Financial stability refers to the ability of a financial system to function efficiently in both good and bad times and to absorb positive and negative events that happen to the economy at any given time. It is not about preventing individuals or businesses from failing, losing money, or succeeding, but rather about creating conditions for the systems continued efficient operation in the face of such occurrences. A financially stable system is characterized by the following features:
- Efficient allocation of resources
- Assessment and management of financial risks
- Maintenance of employment levels close to the natural rate of the economy
- Elimination of relative price movements of real or financial assets that will affect monetary stability or employment levels
A financial system is considered stable when financial institutions, such as banks, savings and loans, and other financial product and service providers, and financial markets are able to provide households, communities, and businesses with the resources, services, and products they need to invest, grow, and participate in a well-functioning economy. The resources and services provided by the financial system include financing for households, communities, and businesses to invest, grow, and participate in a well-functioning economy. In contrast, an unstable financial system is characterized by an economic shock that is likely to have much larger effects, disrupting the flow of credit and leading to larger-than-expected declines in employment and economic activity.
