Abstract
The recent financial crisis has focused attention on the need for better measures and conceptual indicators of financial stress that can help identify vulnerabilities and imbalances that may threaten the stability of the financial system. This paper develops for Israel an intuitive and informative way to summarize and display the large amount of data relating to financial stress in Israel. The methodology, known as a Radar Chart, is used widely in the financial stability literature. It consists of a method for constructing indices of internal and external risks to the financial system and a graphic approach for displaying these key indices. Our contention is that our approach provides an intuitive starting point for policymaking discussions, and allows policymakers to better assess the current condition of the financial system. Our findings successfully capture the dynamics and developments of stress in the financial system in Israel from 1998 onward. We reinforce our results by performing an out-of-sample test showing that our results do not depend on ex post observations.