Question

What contributes to financial stability?

Answer 1

Financial stability refers to financial institutions being effectively able to deliver services and faciliate smooth chain as intermediaries and other services between the investors, savers and borrowers or between households and firms but by acting as a buffer to the economy from external shocks .

After the financial crisis of 2008. many developed countries have come to realize the importance of financial stability. Some of them have even included it as their policy objectives in monetary policies.

In case of financial instability, the financial system cannot provide the financial services that are crucial to the economy which leads to crisis in the economy.

Low and stable inflation contributes to increasing the confidence of consumers and economy in the central bank. This is very inportant comtribution to financial stability. If the public does not have confidence on the central bank , a single bank going wrong could create crisis.

Hence central banks around the world are concerned about the financial stability and put in policies in that direction. This is the reason that at times even the financial stability becomes more importnat than price stability.

This easy facilitation of funds , making demand and supply of funds equal and accessible to the economy is what contributes to financial stability.

Therefore the financial system should be developed in a way that it should not undermine the confidence of investors and public in the economy and help in making a strong financial system for better economic growth.

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