When the structural adjustment or macroeconomic reforms were designed originally during the early 1980s, the aspect of financial stability was not assigned too much of significance, reminisces Vyuptakesh Sharan in ‘India’s Financial Sector: An era of reforms’ (www.sagepublications.com). However, with varying experience of financial crisis in different areas of the global economy from time to time, this aspect began to earn greater attention of the economists and policymakers, he adds.
“Many central banks and the international financial institutions started publishing periodic financial stability reports. The Bank for International Settlements set up the Financial Stability Forum for fostering financial stability through the exchange of information. The World Bank and the International Monetary Fund (IMF) introduced the Financial Sector Assessment Programme to identify vulnerability of the financial system in member countries and to highlight the developmental needs of this sector.”
Financial stability, from a practical standpoint, embraces a sound payment and settlement system and accounting practices related to institutions such as banks, security firms and institutional investors, and markets including capital and money markets, currency and derivative markets, explains Sharan.
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“If a financial system is stable, it means that it has the ability to resolve imbalances through self-corrective mechanism, ultimately rejecting any crisis to set in. It also means that the financial institutions have the ability to absorb shocks in a way that does not permit any interruption in the financial intermediation process.”
Worth studying.