Macroprudential Indicators of Financial System Soundness
Financial System Soundness
March 27, 2019
Weak financial institutions, inadequate regulation and supervision, and lack of transparency were at the heart of the financial crises of the late 1990s as well as the 2008 global financial crisis. That crisis also highlighted the importance of effective systemic risk monitoring and management. This is why the IMF has stepped up efforts to help countries implement policies to support sound financial systems.
Why are sound financial systems important?
A country’s financial system includes its banks, securities markets, pension and mutual funds, insurers, market infrastructures and central bank, as well as its regulatory and supervisory authorities. These institutions and markets provide a framework for carrying out economic transactions and monetary policy and help channel savings into investment, thereby supporting economic growth. Problems in financial systems not only disrupt financial intermediation, but they can also undermine the effectiveness of monetary policy, exacerbate economic downturns, trigger capital flight and exchange rate pressures, and create large fiscal costs related to rescuing troubled financial institutions. Moreover, with increasing connectivity among financial institutions and with tighter financial and trade linkages between countries, financial shocks in one jurisdiction can quickly spill across financial sectors and national borders. Therefore, resilient financial systems that are well regulated and well supervised are essential for both domestic and international economic and financial stability.