Key Factors for the Stability of the Financial System

Momchil Tikov

Economic Thought journal, 2004, issue 2, 52-71

Abstract: The stability of the financial system is an important part of overall macroeconomic stability. The importance of a reliable and efficient financial system is determined by the fact that financial intermediaries represent the unit which converts deposits into investment and routes the latter towards the sectors of the economy that require financial resources in order to function. The financial system is the place where the national wealth is kept, that is why it is perceived as a symbol of public welfare. Among factors influencing the stability of the financial system are not only the elements of the environment in which intermediaries operate, but also factors peculiar to the system itself. While some of those have a positive effect on the safety of the system and others negative, very often a factor has a stabilizing effect up to a critical threshold and beyond that it causes fluctuations. Whether a factor will have a positive or negative effect is determined to a great extent by the stage of development of the financial system and its shock-absorbing potential.

JEL-codes: E63 G21 (search for similar items in EconPapers)
Date: 2004
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