Book contents
- Frontmatter
- Contents
- List of Boxes
- List of Figures
- List of Tables
- List of Countries
- List of Abbreviations
- Preface
- Part I Setting the Stage
- Part II Financial Markets
- Part III Financial Institutions
- Part IV Policies for the Financial Sector
- 10 Financial Regulation and Supervision
- 11 Financial Stability
- 12 European Competition Policy
- Index
- References
This chapter is part of a book that is no longer available to purchase from Cambridge Core
11 - Financial Stability
from Part IV - Policies for the Financial Sector
Book contents
- Frontmatter
- Contents
- List of Boxes
- List of Figures
- List of Tables
- List of Countries
- List of Abbreviations
- Preface
- Part I Setting the Stage
- Part II Financial Markets
- Part III Financial Institutions
- Part IV Policies for the Financial Sector
- 10 Financial Regulation and Supervision
- 11 Financial Stability
- 12 European Competition Policy
- Index
- References
Summary
OVERVIEW
While prudential supervision aims at the proper management of individual financial institutions, maintaining financial stability is primarily concerned with systemic risks, i.e., events that will trigger a loss of economic value or confidence in, and attendant increases in uncertainty about, a substantial portion of the financial system that is serious enough to have significant adverse effects on the real economy. In addition to prevention, maintaining financial stability implies taking the necessary steps to restore financial stability after a crisis has occurred. Prudential and systemic concerns may overlap when large financial intermediaries face bankruptcy.
The policy objective of maintaining financial stability has gained importance in recent decades. The greater emphasis on financial stability is mainly related to the expansion and liberalisation of financial systems. First, financial systems have grown faster than the real economy. Given the size of the financial system and its importance to the real economy, a financial crisis can have substantial fiscal costs and output losses. Second, financial systems have become more complex in recent decades, and as a result it is much more difficult to assess financial risks and vulnerabilities. For example, as a result of financial innovation, banks (and other providers of credit) increasingly transfer the credit risk to other market parties. This has increased the opaqueness of the financial system, as was painfully exposed by the sub-prime mortgage crisis of 2007/2008.
- Type
- Chapter
- Information
- European Financial Markets and Institutions , pp. 334 - 370Publisher: Cambridge University PressPrint publication year: 2009
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