Page 7 - Material about Central bank

Financial System Stability

Refers to the condition in which the financial system of a country or region operates well
and is not affected by external or internal turmoil that could disrupt the smooth running of
financial activities. This includes various financial institutions and markets, such as banks,
stock markets, bond markets, and non-bank financial institutions.

The following are several important components of financial system stability:

1) Financial Institution Stability: Financial institutions, such as banks and other financial
institutions, must have adequate financial strength and good governance. This is
important to prevent the risk of institutional failure, which could disrupt the stability of
the financial system.
2) Financial Market Stability: Financial markets, including stock markets, bond markets,
and foreign exchange markets, must function efficiently and transparently. The
existence of adequate liquidity and prices that reflect correct information are important
factors for financial market stability.
3) Effective Supervision and Regulation: A strong and effective system of supervision
and regulation from financial authorities and central banks is key to ensuring that
financial institutions and markets operate properly. Strict regulations help prevent
unwanted risks and ensure transparency and accountability.
4) Risk Management: Good risk management throughout the financial system is key to
preventing a financial crisis. This includes managing credit risk, market risk and
operational risk.
5) Crisis Preparedness: The financial system must have mechanisms and tools to
overcome a financial crisis if it occurs. This includes the existence of emergency funds,
intervention policies, and deposit guarantee mechanisms.
6) Preventing and Handling Financial Crises: Financial authorities and central banks must
have a clear strategy to prevent and deal with financial crises if they occur. This could
involve measures such as providing emergency liquidity and restructuring financial
institutions threatened with bankruptcy.

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