Financial Stability and Macroprudential Oversight

What is financial stability and why is it important?


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What is financial stability and why is it important?

The Bank defines financial system stability to refer to the effort of the Bank aimed at promoting the development of sound and well-managed banking and other financial institutions as well as encouraging the development of efficient and well-functioning financial markets.

 Rationale for importance of financial stability

Financial stability is important as it reflects a sound financial system, which in turn is important as it reinforces trust in the system and prevents phenomena such as a run on banks, which can destabilize an economy. Additionally, a sound financial system signals to the public that their money is handled in a way which will not unduly jeopardise it. This is especially important for savings, including pension savings.

Elements of Financial Stability include an early warning system of monitoring relevant indicators; as well as stimulating and making provisions for possible realistic strains on the system by conducting stress testing. The above help regulators to monitor the system and prepare for ways to avert potential or discovered stress on the system.

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