Financial Stability

8 Key excerpts on "Financial Stability"

• 

  eBook - PDF

  Banking on the Future

  The Fall and Rise of Central Banking

  • Howard Davies, David W. Green(Authors)
  • 2010(Publication Date)
  • Princeton University Press

    (Publisher)

  In 2008, the ECB had a second try: 11 Financial Stability can be defined as a condition in which the finan-cial system . . . is capable of withstanding shocks and the unravelling of financial imbalances, thereby mitigating the likelihood of disruptions in the financial intermediation process which are severe enough to signif-icantly impair the allocation of savings to profitable investment oppor-tunities. While the new definition is somewhat more precisely specified, it has a contingent, post-crisis flavor. The Swiss National Bank has also proposed a definition, ending up in a similar place: “A stable financial system can be defined as a system where the various components fulfil their functions and are able to withstand the shocks to which they are exposed.” 12 Pressed in Parliament in July 2008 to offer his own definition, Mervyn King said 13 55 C H A P T E R T H R E E I would think of Financial Stability as a period during which the payment system worked normally and the ability of households to mediate their savings into real investment in the economy at home or abroad operated normally. It was an impressive off-the-cuff response—one does not get advance notice of questions in the British Parliament—only slightly undermined when he went on, “But the question is—what is normally?” and did not offer an answer. Surprisingly, the Icelandic central bank offers one of the most substan-tial diagnoses, making use of a definition initially proposed by Andrew Crockett 14 when he was general manager of the BIS.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Systemic Financial Crises: Resolving Large Bank Insolvencies

  Resolving Large Bank Insolvencies

  • Douglas D Evanoff, George G Kaufman(Authors)
  • 2005(Publication Date)
  • World Scientific

    (Publisher)

  Unlike monetary stability, Financial Stability has no off-the-shelf def-inition. Myriad definitions have been proposed in the literature (see, for example, Houben, Kakes and Schinasi, 2004). A great many of these defi-nitions view Financial Stability through the prism of financial crises. Indeed, 83 84 A. G. Haldane et al. some interpret financial instability even more narrowly, as a large-scale unanticipated collapse of the banking system which reduces the stock of money (for example, Friedman and Schwartz, 1963). In this paper we take a somewhat broader definition. Financial Stability can be thought to be, on the one hand, about enabling individuals to smooth consumption across time (for example, by saving and borrowing) or across states of nature (for example, through insurance contracts); and, on the other, about efficient financing of investment projects with saved resources. At root, it is about the saving–investment nexus (Haldane, 2004). On this definition, financial in stability could be defined as any devia-tion from the optimal saving–investment plan of an economy deriving from imperfections in the financial sector. The advantage of this definition is that it is generic. It nests financial crises and specifically banking crises as a special case of financial instability; a drawing, if you like, from the tail of the financial instability distribution. Or put differently, a systemic bank-ing crisis is a severe disturbance to the intermediated saving–investment nexus. The relationship between systemic banking crises and financial sta-bility more generally is clearly multi-dimensional. There are transmis-sion channels working in both directions.

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  Central Banking

  Theory and Practice in Sustaining Monetary and Financial Stability

  • Thammarak Moenjak(Author)
  • 2014(Publication Date)
  • Wiley

    (Publisher)

  Taken in the aggregate, if the shaky financial positions of individual players becomes a big enough problem, it could become a systemic risk and a threat to the financial system. To deal with information asymmetry in the Financial Stability context, hence, at least three broad issues must be addressed: (1) transparency in financial information, (2) the financial literacy of the population, and (3) alignment of incentives to correct for potential principal-agent problems. SUMMARY Financial Stability is a relatively new term, and as such there is not yet a single, quantifiable definition that is widely agreed upon, unlike, for example monetary stability, which could be defined as low and stable inflation. Definitions of Financial Stability often encompass many elements, including the smooth and effective functioning of the financial system, the low probability of default, the absence of stress and disruptions in the financial system, and the absence of major financial imbalances in the economy. To make the analysis more tractable, this book uses an analytical framework divided into three key interrelated areas of Financial Stability: the macroeconomy, financial institutions, and financial markets. Such a framework helps group fragmented theories with regard to Financial Stability, and also corresponds well with modern central banks’ institutional setups. Theoretically, threats to Financial Stability might occur in the macroeconomy through the interaction between real economic activity and financial activities. Easy money conditions could encourage more speculative activities, which can turn into asset price bubbles and economic instability. The work of Gurley and Shaw in 1995, Kindleberger in 1978, and Minsky in 1986 provides insight into this phenomenon. According to the 1983 work of Diamond and Dybvig, a bank is inherently prone to a run, since it takes in deposits that are very liquid but lends out the funds into illiquid projects

  Sign up to read

  Learn more about book
• 

  No longer available |Learn more

  How Latin America Weathered the Global Financial Crisis

  • José De Gregorio(Author)
  • 2013(Publication Date)
  • Peterson Institute for International Economics

    (Publisher)

  It includes efficient intermediate financial flows in 8. The Bank of England was actually founded to finance the war with France in the late 17th century (Davies and Green 2010). Financial Stability 83 normal times and resilience in times of turbulence. Here the term is used in a broad sense. A distinction also must be made between micro- and macrofinan-cial stability. Speaking of terms, Borio and Drehmann (2009, 2) provide some useful definitions: We define financial distress as an event in which substantial losses at finan-cial institutions and/or their failure cause, or threaten to cause, serious dis-locations to the real economy. We define financial instability as a situation in which normal-sized shocks to the financial system are sufficient to produce financial distress, i.e., in which the financial system is “fragile.” Financial sta-bility is then the converse of financial instability. Because of the many dimensions of Financial Stability, many institutions are involved in attempts to achieve that stability. Central banks are usually in charge of the stability of the whole financial system. Thus they focus on interactions between different segments of the market. Financial supervisors, such as superintendents of supervisory agencies, look after the soundness of specific financial institutions. Some countries combine in the central bank the roles of banking supervisor and purveyor of monetary policy. The effective-ness of this institutional arrangement depends on the specific characteristics of a country. However, conflicts of interest may arise from vesting all tasks to preserve Financial Stability and monetary policy in a single institution. It is better to resolve those conflicts with institutional coordination and a clear delegation of responsibilities than to centralize control and monitoring in a single body. Central banks are the guardians of price stability. They should also be independent institutions.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Remembering Inflation

  • Brigitte Granville(Author)
  • 2013(Publication Date)
  • Princeton University Press

    (Publisher)

  For Mishkin (1999: 6) financial instability occurs when shocks to the financial system interfere with information flows so that the financial system can no longer do its job of channelling funds to those with productive investment opportunities. Others such as De Graeve, Kick, and Koetter (2007: 3) focus on distress in one or more major banks. Whatever definitional issues remain unresolved by professional economists, there is little difficulty identifying the period beginning in August 2007 with the emergence of credit problems in the subprime segment of the U.S. mortgage market as one of financial system instability. The relationship between monetary stability and broader financial sta-bility hinges on the combined responsibilities of most central banks for the value of the currency and the functioning of credit markets (through direct supervision of the banking system and/or the mandate to prevent and contain financial crises as lenders of last resort [LLR]). Central banks therefore focus on both monetary and Financial Stability. Financial sector policies (whether conducted by central banks on their own or in conjunc-tion with other specialized financial regulators) affect Financial Stability at both the microeconomic and macroeconomic levels. At the microeconomic C H A P T E R 6 156 level, regulation helps to reduce the risk of failure of an individual financial institution, while at the macroeconomic level it aims at protecting the en-tire financial system. The idea that monetary stability encourages financial instability is con-troversial. We saw in the previous chapter that inflation is often the root cause of financial instability by distorting information flows between lend-ers and borrowers, leading to asset bubbles and over investment. Therefore if anything monetary stability should promote Financial Stability in the long run and not the other way around. Most empirical evidence tends to sup-port this view.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Financial Developments in National and International Markets

  • Jesús Ferreiro, Felipe Serrano, P. Arestis(Authors)
  • 2005(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  3 Financial System Regulation Stability versus Instability: Some Strategic Consideration David Ceballos and David Cantarero 40 Since the 1990s, both frequency and magnitude of financial crises have increased, affecting above all the emerging economies (Latin America and South East Asia), but also Europe and the European Monetary System (EMS), the USA, Mexico, Thailand, Korea, Indonesia, Russia, the Long-term capital management (LTCM) hedge fund, Argentina, Brazil, the technological bubble, dot.com companies and many others. These events have had a variety of causes and a range of different consequences, but each crisis supposes a dete- rioration of (i) a system’s credibility; (ii) its credit solvency; and/or (iii) the productive economy. For these reasons, it is clear that Financial Stability is the desired state. The financial notion of stability draws on the idea of a financial system that is exposed to neither abrupt nor regular fluctuations, and above all to those that might induce financial losses. In practice, stability supposes controlling financial risk so that when an unfavourable contingency does occur, it does not exceed expected loss levels and has a negative impact on the solvency and credibility of the financial system, and by extension on the real economy. What is required, therefore, are a number of preventive mea- sures that might act to regulate the system or provide prudential supervision so as to maintain a stable macroeconomic environment and thus avoid inefficient agents that serve to undermine the system. Public regulation means that, in times of crisis, if preventive measures are seen as being insufficient, large and generalized losses could occur as a result of moral hazard, adverse selection, loss of market credibility or speculation and so on.

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  Risk Management in the Polish Financial System

  • Marian Noga, Konrad Raczkowski, Jaros?aw Klepacki, Jaros?aw Klepacki, Jaros?aw Klepacki, Jaros?aw Klepacki, Jarosław Klepacki(Authors)
  • 2015(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  3 Management of Financial Stability Risk

  Introduction

  A record number of organizations -governmental, commercial/nongovernmental - are currently dealing with the management of Financial Stability risk, especially in the sector of economies and financial markets. The issue has become so popular nowadays that it might seem boring and overrated. On the contrary, it is still a very underdefined process. It is difficult to successfully manage something, if in fact one does not exactly know what it is. There is no consistent and generally accepted definition of risk. Acts of law do not provide a clear statutory definition of what risk involved in Financial Stability is either. The definitions that have been provided are very general in nature. There is even a problem with developing an accurate definition of such seemingly prosaic risk as legal risk.

  The management processes in operation now are mainly based on the latest experiences (from the most recent years), that is, the consequences of the economic crisis initiated by a crash on the financial markets in August 2008 and the collapse of Lehman Brothers Bank.

  It is becoming more and more obvious that the management of Financial Stability risk is assuming a completely new importance. At first, it was a local phenomenon typical for processes occurring at the beginning of the first half of the 20th century, and then it transformed into a chain of global events that can be seen now. The perception of risk has also evolved. From an underrated, underestimated, and underdefined thing concentrated mainly on statistical and mathematical assumptions, it transformed into a phenomenon observed in more and more contexts, having a global scale, and influenced by strong behavioral factors. The attitude toward the process of management itself has changed as well. It used to be passive and of rather secondary importance, and now it is extremely active and not oriented at all toward the elusive elimination or neutralization but rather the efficient diversification of risk and the maximum limitation of of its negative consequences.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  The Successes and Failures of Economic Transition

  The European Experience

  • H. Gabrisch, J. Hölscher(Authors)
  • 2006(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  As a minimum it can safely be stated that by definition such a process needs time. This is particularly crucial under the circumstances of the early years of transition, when inflation was high Financial Institutions, Stability and Growth 43 Box 3.1 The functions of money 1. Medium of exchange ● Money provides a medium for the exchange of goods and services which is more efficient than barter 2. Unit of account ● Money provides a unit in which prices are quoted and accounts are kept 3. Store of value ● Money can be used to make purchases in the future 4. Standard of deferred payment ● Money is a unit of account over time: this enables borrowing and lending and the exchange rate deteriorated. Furthermore it remains unlikely that the functions of money in a market economy can be established without the existence of money and capital markets. We suggest that the central bank is as a participant in these markets rather than an institution of control, which indeed would refer to the era of planned economies. The idea of financial programming and the perfect control of the money supply by the central bank has not much in common with endogenous money supply in the modern monetary economy. Only very few econo- mists such as Michael Kaser (Kaser 1990) saw this problem, which seems to be obvious today, at the very beginning of transition. Financial systems as stabilizers The transition towards a market-type economy has experienced substantial setbacks in economic development through crises in the financial sector. The aim of this chapter is therefore to analyse how the financial sector can contribute to the stability of the transition process rather than causing instability. The emphasis of this chapter is therefore not put on the usual question of how to build an efficient financial system in order to ensure the efficient allocation of savings (see, for example, Buch 1997), but focuses on the possibilities of how the financial sector can promote stability and growth.

  Sign up to read

  Learn more about book