THE FINANCIAL SYSTEM AND ECONOMIC STABILITY A stable financial system is capable of efficiently allocating resources, assessing and managing financial risks, maintaining employment levels close to the economy's natural rate, and eliminating relative price movements of real or financial assets that will affect monetary stability or employment levels. A financial system is in a range of stability when it dissipates financial imbalances that arise endogenously or as a result of significant adverse and unforeseen events. In stability, the system will absorb the shocles primarily via self-corrective mechanisms, preventing adverse events from having a disruptive effect on the real economy or on other financial systems. Financial stability is paramount for economic growth, as most transactions in the real economy are made through the financial system. The true value of financial stability is best illustrated in its absence, in periods of financial instability. During these periods, banks are reluctant to finance profitable projects, asset prices deviate excessively from their intrinsic values, and payments may not arrive on time. Major instability can lead to bank runs, hyperinflation, or a stock maricet crash. It can severely shake confidence in the financial and economic system. Recent years have seen central banks pay increased attention to monitoring the risk of financial instability. The approaches adopted by various central banks have much in common, although there are certain important differences. Some central banks rely mainly on aggregate macroeconomic and prudential data, while others make extensive use of supervisory data on individual financial institutions. Moreover, some central banks rely heavily on models of the financial sector, while others use a more eclectic approach. Overall, the work on indicators of financial stability has led to a more focused analysis and a greater understanding of the aggregate risks to the financial system, even if it has not led to the development of a simple indicator of financial stability The Impacts of Global Financial Crisis Financial systems can contribute to economic development by providing people with useful tools for risk management, such as credit for productive investments, instruments for saving and insurance, and payments services. At the same time, when financial institutions fail to manage the risks they retain, they can create severe financial crises with devastating social and economie effects, especially for the world's most vulnerable people. Crises can hit hard the weakest members of the society, particularly the poor, elderly, young, and women, who are not well-equipped to cope with the consequences of sing prices, eroding savings and asset values, loss of jobs, and reduction in core public services, such as social welfare, health care, and education. The global financial crisis that has shaken the world economy since late 2007 has transformed the lives of many individuals and families beyond imagination. The bankruptcy of a US investment bank, Lehman Brothers, in 2008 turned a severe credit crunch into the worst financial crisis since the Great Depression, resulting in an unprecedented dislocation in financial markets and damaging stability and confidence in many advanced financial systems. The unprecedented pouring of financial support from national governments and monetary authorities may.. 1. Questions Why might financial systems fail to allocate resources to their most desirable use? In your answer you may use the financial sector in Bahrain as an example of success or failure of financial institutions and their contribution to the economy. 2 The role of the central bank is crucial in restoring stability in the financial system. If you consider the central bank of Bahrain as a good model for financial and economic stability, how do you explain your answer. Can you provide examples of some of the approaches taken by the central bank to support the stability of the economy? 3. Financial institutions are subject to regulation to ensure that they do not take excessive risk and can safely facilitate the flow of funds through financial markets. Nevertheless, during the credit crisis, individuals were concerned about using financial institutions to facilitate their financial transactions. Why do you think the existing regulations were ineffective at ensuring a safe financial system? Consider the current economic conditions, ie, the state of coronavirus pandemic. Do you think the central bank should increase interest rates, reduce interest rates, or leave interest rates unchanged? offer some logic to support your answer. Why might a foreign government's policies be closely monitored by investors in other countries, even if the investors plan no investments in that country? Explain how monetary policy in one country can affect interest rates in other countries. 4. 5. THE FINANCIAL SYSTEM AND ECONOMIC STABILITY A stable financial system is capable of efficiently allocating resources, assessing and managing financial risks, maintaining employment levels close to the economy's natural rate, and eliminating relative price movements of real or financial assets that will affect monetary stability or employment levels. A financial system is in a range of stability when it dissipates financial imbalances that arise endogenously or as a result of significant adverse and unforeseen events. In stability, the system will absorb the shocles primarily via self-corrective mechanisms, preventing adverse events from having a disruptive effect on the real economy or on other financial systems. Financial stability is paramount for economic growth, as most transactions in the real economy are made through the financial system. The true value of financial stability is best illustrated in its absence, in periods of financial instability. During these periods, banks are reluctant to finance profitable projects, asset prices deviate excessively from their intrinsic values, and payments may not arrive on time. Major instability can lead to bank runs, hyperinflation, or a stock maricet crash. It can severely shake confidence in the financial and economic system. Recent years have seen central banks pay increased attention to monitoring the risk of financial instability. The approaches adopted by various central banks have much in common, although there are certain important differences. Some central banks rely mainly on aggregate macroeconomic and prudential data, while others make extensive use of supervisory data on individual financial institutions. Moreover, some central banks rely heavily on models of the financial sector, while others use a more eclectic approach. Overall, the work on indicators of financial stability has led to a more focused analysis and a greater understanding of the aggregate risks to the financial system, even if it has not led to the development of a simple indicator of financial stability The Impacts of Global Financial Crisis Financial systems can contribute to economic development by providing people with useful tools for risk management, such as credit for productive investments, instruments for saving and insurance, and payments services. At the same time, when financial institutions fail to manage the risks they retain, they can create severe financial crises with devastating social and economie effects, especially for the world's most vulnerable people. Crises can hit hard the weakest members of the society, particularly the poor, elderly, young, and women, who are not well-equipped to cope with the consequences of sing prices, eroding savings and asset values, loss of jobs, and reduction in core public services, such as social welfare, health care, and education. The global financial crisis that has shaken the world economy since late 2007 has transformed the lives of many individuals and families beyond imagination. The bankruptcy of a US investment bank, Lehman Brothers, in 2008 turned a severe credit crunch into the worst financial crisis since the Great Depression, resulting in an unprecedented dislocation in financial markets and damaging stability and confidence in many advanced financial systems. The unprecedented pouring of financial support from national governments and monetary authorities may.. 1. Questions Why might financial systems fail to allocate resources to their most desirable use? In your answer you may use the financial sector in Bahrain as an example of success or failure of financial institutions and their contribution to the economy. 2 The role of the central bank is crucial in restoring stability in the financial system. If you consider the central bank of Bahrain as a good model for financial and economic stability, how do you explain your answer. Can you provide examples of some of the approaches taken by the central bank to support the stability of the economy? 3. Financial institutions are subject to regulation to ensure that they do not take excessive risk and can safely facilitate the flow of funds through financial markets. Nevertheless, during the credit crisis, individuals were concerned about using financial institutions to facilitate their financial transactions. Why do you think the existing regulations were ineffective at ensuring a safe financial system? Consider the current economic conditions, ie, the state of coronavirus pandemic. Do you think the central bank should increase interest rates, reduce interest rates, or leave interest rates unchanged? offer some logic to support your answer. Why might a foreign government's policies be closely monitored by investors in other countries, even if the investors plan no investments in that country? Explain how monetary policy in one country can affect interest rates in other countries. 4. 5