Definition of Financial Stability
Financial stability can be defined as “a condition in which the financial system is not unstable". It can also mean a condition in which the three components of the financial system -- financial institutions, financial markets and financial infrastructure -- are stable.
- ‘Stability of financial institutions’ refers to a condition in which individual financial institutions are sound enough to carry out their financial intermediation function adequately, without assistance from external institutions including the government.
- ‘Stability of financial markets’ means a condition in which there is no major disruption of market transactions, with no significant deviation of financial asset prices from economic fundamentals, thereby enabling economic agents to raise and operate funds with confidence.
- ‘Stability of financial infrastructure’ refers to a condition in which the financial system is well structured to ensure smooth operation of market discipline, and both the financial safety net and the payment and settlement system are running effectively.
Financial stability can be more broadly defined as “a condition in which the financial system can facilitate real economic activities smoothly and is capable of unravelling financial imbalances arising from shocks.”
Why is Financial Stability Important?
Financial stability is an essential requirement not only for price stability, the policy goal of the central bank, but also for healthy development of the economy. This is because financial instability entails heavy costs for an economy, since the volatility of price variables in the financial markets increases and financial institutions or corporations may go bankrupt. In addition, economic development can be limited at such a time, since economic agents find it difficult to make rational decisions and the efficiency of resource allocation is reduced.
Since the 1980s, many countries around the world have achieved the positive effects of rapid financial industry growth owing to the progress of financial liberalization. At the same time, however, they have also experienced periods of dramatic slowdown in economic growth, due to heavy economic expenses arising from financial instability or financial crises.
Against this backdrop, many countries have started to place great emphasis on financial stability when implementing their policies. Attention paid to financial stability is growing, as new factors with the potential to generate financial instability, including the strengthening of financial sector links among countries and the rampant development of complex financial instruments, have recently emerged.
FAQs
Definition of Financial Stability
What is the financial stability of South Korea? ›
As of November 2022, the financial stability index (FSI) of South Korea reached 23 points, showing an overall increase compared to the previous months. The index value reached the highest level in April 2020 and fell thereafter.
What is the definition and importance of financial stability? ›
Financial stability is a condition in which an economy's mechanisms for pricing, allocating, and managing financial risks (credit, liquidity, counterparty, market, etc.) are functioning well enough to contribute to the performance of the economy (as defined above).
What is the financial system in South Korea? ›
The financial sector accounts for an increasingly large share of the South Korean economy. It consists of more than 3,000 institutions, such as banks, non-bank deposit-taking institutions, insurance companies, securities firms, and financial auxiliaries.
Why is it important to be financially stable? ›
Financial stability is important not only because it means that you have enough money to pay for the costs of life, but it also provides peace of mind by reducing stress related to money. With this important issue taken care of, you can instead focus on personal goals and overall well-being.
Is South Korea's economy stable? ›
In 2023, South Korea's economy grew 1.4%, a three-year low after gains of 2.6% in 2022 and 4.3% in 2021. The economy is expected to grow 2.1% in 2024, according to the BOK. Get a look at the day ahead in Asian and global markets with the Morning Bid Asia newsletter. Sign up here.
Why is South Korea's economy so strong? ›
The country has displayed global competitiveness in various fields such as mobile phones, semiconductors, automobiles, chemicals, and steelmaking. In recent years, its cultural content, including music, gaming, and webtoons, is emerging as an essential industry in itself, taking the lead in the Korean economy.
What is your definition of financial stability? ›
Financial stability is a condition in which an economy's mechanisms for pricing, allocating, and managing financial risks (credit, liquidity, counterparty, market, and so forth) are functioning well enough to contribute to the performance of the economy.
What is financial stability in simple words? ›
Financial stability can be defined as “a condition in which the financial system is not unstable". It can also mean a condition in which the three components of the financial system -- financial institutions, financial markets and financial infrastructure -- are stable.
What is the key to financial stability? ›
You can create financial stability by implementing strong money habits such as budgeting your income, saving automatically, growing your emergency fund, paying down debt and monitoring your credit score.
Based on their review of the crisis and policies, they suggest that the primary factors causing the 1997 crisis were structural weaknesses—notably a weak financial sector with limited ability to assess risk and an over-leveraged corporate sector with insufficient attention to profitability—that left the Korean economy ...
What was the financial crisis in Korea? ›
The financial crisis that hit Korea in the last half of 1997 had a devastating impact on the Korean economy, causing Korea's worst recession in the postwar era. Real GDP growth fell from levels which had been running in the positive 5 to 10% range before the crisis to a negative 5.8% rate in 1998.
How did South Korea recover from financial crisis? ›
After the 1997 crisis, the government implemented various restructuring measures in the financial sector to remove the structural weaknesses and restore foreign investors' confidence. The initial financial restructuring was based on an agreement with the IMF and the Korean Government signed on 3 December 1997.
Is financial stability is important for happiness? ›
Financial stability can have an impact on the level of happiness. Research suggests that the effects of financial crises, such as the 2008 crisis, can lead to a decrease in life satisfaction.
Is financial stability important in a relationship? ›
Almost nine in ten respondents (89%) said that financial stability was necessary for a happy and successful relationship, while only 11% said it was not.
Why is financial stability important in a family? ›
Preserving the Core of Family Happiness Financial stability isn't just about wealth; it's about preserving the essence of family happiness. Access to quality healthcare, a stress-free environment, and the ability to focus on well-being become paramount, fostering a healthier and more harmonious family life.
Does South Korea have a debt problem? ›
According to the Bank for International Settlements, Korea's household debt-to-GDP came to 101.7 percent as of the second quarter of 2023. Korea is only among a few economies whose debt exceeds GDP.
Is South Korea in a budget surplus or deficit? ›
South Korea Consolidated Fiscal Balance recorded a deficit equal to 2.0 % of its Nominal GDP in Sep 2023, compared with a deficit equal to 2.1 % in the previous quarter See the table below for more data.
Is there a lot of debt in South Korea? ›
The IMF-calculated net debt of South Korea stood at 17.97% of GDP at the end of 2020. This is a very low figure when compared to the gross debt ratio of 48.4%. This shows that the government of South Korea owns a lot of financial assets, which are valued at the equivalent of 30.2% of the country's GDP.
Why does South Korea have a debt problem? ›
Korea's credit troubles reflect broader woes from the US to Europe to Southeast Asia as central banks rushed to raise interest rates to tame surging inflation. That increased the cost for borrowers to refinance debt they piled up during real estate booms when money was cheaper.
