An economy that performs well and efficiently requires a stable and robust banking and financial system. Trust in the stability of the banking and financial system is indispensable for the smooth and efficient supply of funds to the corporate, private and public sectors, and this trust must be consistently upheld. To this end, the entire financial market must observe a strict rule-based framework. Given the wide variety of complex financial products available and the ever closer links between national financial systems, the Oesterreichische Nationalbank (OeNB) invests substantial effort in improving these rules in line with international developments and ensuring that they are respected.
How is financial stability defined?
Financial stability means that the financial system – financial intermediaries, financial markets and financial infrastructures – is capable of ensuring the efficient allocation of financial resources and fulfilling its key macroeconomic functions even if financial imbalances and shocks occur. This means that the financial system should consistently direct funds to those activities that deliver the greatest economic benefits. Under conditions of financial stability, economic agents have confidence in the financial system and have ready access to financial services, such as payments, lending, deposits and hedging.
Who benefits from financial stability?
Maintaining financial stability is in the interest of all economic agents. Without financial stability, all economic agents who save, invest, borrow or lend will lose trust in the financial system – and the economy would suffer. The table below lists the advantages of a stable financial system for various agents.
Financial stability means that…
...can be certain that their saving deposits are safe.
...holders of bank
...receive interest in line with the bond terms and will get back their
principal at maturity.
...holders of bank
...do not lose their capital investment.
...do not have to pay for the rescue of troubled financial institutions.
...have access to loans if they meet creditworthiness requirements
and can thus finance investment.
...can grow and generate wealth. ...central banks...
...can rely on a functioning banking system to transmit
price stability-oriented monetary policy impulses.
What puts financial stability at risk?
Financial stability is endangered directly if financial institutions become insolvent or illiquid. Financial stability is endangered indirectly by vulnerabilities of the financial system itself, including wrong investment choices, mismanagement and misjudgment of risks taken. Furthermore, the interdependence of the different economic agents in the financial system was underestimated in the past. A greater awareness of the contagion effect of one bank’s problems on other banks has developed.
As a rule, however, the insolvency of a single bank does not represent a risk to the entire financial system. If the failing bank is very large and has extensive links to other financial institutions and their business activities, however, the consequences, in particular the impact on the financial system as a whole, are difficult to predict.