Measuring macroprudential risk through financial fragility: a Minskian approach

The paper uses the analytical framework developed by Hyman P. Minsky to construct an index of financial fragility for residential housing in the United States, the United Kingdom, and France. In the process, a clear difference is made between financial fragility, bubble, and fraud. The goal is to capture the growing interdependence between debt and asset price on the upside. The index is able to capture the rapid growth of financial fragility in residential housing from the early 2000s and an usually high level of financial fragility from 2004 in the United States. However, the construction of the index reveals that the data available are of limited quantity and quality for the purpose at hand. If the Financial Stability Oversight Council is serious about measuring systemic risk, better data about cash flows and loan underwriting should be collected in order to get an idea of the quality of leverage. This quality is measured by focusing on the means used to service debts instead of ability and willingness to service debt per se (i.e. credit risk).