Question

The sources of financial de-stability are originated from the financial system itself. Explain.

Answer 1

Resources of financial disability are originated from financial system because there are discrepancies in the financial system which led to emergence of various financial destability which would be resulting due to changes in the monetary policies which are adopted by the central banks and which can also be attributed to misrepresentation of the financial statements by the management of the company in order to window dress and present a rosy picture of their overall performance which is not reflective of their true performance.

There is always urge of reporting higher than normal profit by various managers because these managers are always trying to present a better picture of the company to the investors in order to protect them jobs. it is not the actual case and this leads to financial stability because finance is a interlinking of various factors if there is a mis reporting on the part of the management on the front of financial statement, then it would lead to generation of better debt financing by the company through the banks and these banks will collateralize those loans through different assets which has been highly infected by the management and then this banks will be floating onto those assets to another companies in order to generate liquidity so when the financial system collapses, there is a contagion which will be leading to collapse of multiple organisation which are interlinked through these transactions and it can lead to a financial destability which has been arisen out due to urge to misrepresent the books of accounts and not present the fair picture to the shareholders.