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Bank of Mauritius Financial Strength: A z-score analysis
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Bank of Mauritius Financial Strength: A z-score analysis
Profit-making central banks are deemed as sound financial institutions imbued with stronger level of independence. Central banks stand out from any other financial institutions in the world as they are the only institutions which can operate even un- der negative equity – Central Bank of Chile and Czechoslovakia being flagrant instances explained by the fact that they are vested with the sole power of issuing notes and coins. Such a state of affairs acted as the rationale as to why central banks’ balance sheets were employed to absorb the detrimental impacts of the US subprime crisis.
Mauritius is merely a small open economy at the international level and its central bank needs to ensure that it has robust financial strength in fulfilling its tasks. In this article, recourse is made towards the Z-score to analyse the profitability state/financial strength of the Bank of Mauritius. Computed as the sum of return on equity and capital to total assets, all divided by the standard deviation of return on equity, the Z-score ratio is interpreted as the number of standard deviation of a BoM’s asset returns has to decline before it becomes insolvent. From the figure below, it is glaring that Bank of Mauritius is facing a strenuous challenge of squeezing Z-score levels indicative of weaker financial strength. In 2001, the Z-score stood above 12 to steadily experience a declining state, ending up at slightly below 2 in 2017.
The above finding entails important implications for policymakers and the general public at large. First, it can be expected that BoM will issue new notes and coins to boost its level of seigniorage income in the years to come as a process to consolidate its income generating power. Second, BoM’s independence level is anticipated to be undermined. Third, should international shocks manifest which are beyond the financial strength (flow component) of BoM, then, reserves (stock component) will be particularly useful to act as buffer to absorb these shocks.
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