financialstability

Financial stability is a condition in which the financial system, comprising banks, markets, payment systems, and market infrastructure, is resilient to shocks and able to perform its core functions. These functions include channeling saving into investment, pricing and distributing risk, enabling payments, and transmitting monetary policy. In a stable system, disruptions by one institution or market are contained, funding liquidity remains adequate, and confidence is sustained.

Systemic risk arises from the interconnectedness and common exposures of financial actors. Shocks can propagate through funding markets, balance sheets, and confidence channels, potentially triggering firesales, solvency concerns, and broad credit tightening. Financial stability does not imply an absence of risk, but rather effective management of risks so that isolated problems do not escalate into a crisis.

Key indicators and tools used to assess stability include capital adequacy and leverage ratios, liquidity metrics, funding profiles, and results from macroprudential stress tests. Other measures include the credit-to-GDP gap, market liquidity, and operational resilience. Policy tools aim to reduce systemic risk and enhance resilience, such as capital and liquidity requirements, countercyclical buffers, stress testing, resolution regimes, and lender-of-last-resort facilities. Coordination between monetary and macroprudential authorities is important, as is international cooperation.

Institutions involved include central banks, financial supervisors, and financial stability bodies, with oversight and standards set by international groups. Challenges to maintaining stability include data gaps, model risk, cross-border spillovers, and balancing stability with economic growth.