Financial stability
Topic: Banking, Credit Creation and Monetary Policy · NCERT: Beyond NCERT
Meaning
Financial stability is a state in which banks, markets and payment systems work smoothly. It also means they can absorb shocks, such as a large loan default or a market crash, without stopping the flow of credit and payments. It matters because a crisis in one bank or market can spread across the whole economy. RBI protects it with macroprudential tools, which are rules aimed at risk in the whole financial system. Examples are sectoral risk weights, loan-to-value caps and provisioning norms.
Example
RBI publishes a Financial Stability Report every six months, in June and December. The Financial Stability and Development Council (FSDC), set up in 2010 and chaired by the Finance Minister, coordinates the regulators. In November 2023, RBI raised risk weights on unsecured consumer loans to guard against build-up of risk.
Don't confuse with
- Price stability: this means low and steady inflation, the main goal of monetary policy. It is pursued mainly through the repo rate. Financial stability is pursued through macroprudential tools, following the rule of one instrument for each goal.
Related concepts
- Qualitative tools of monetary policy
- Margin requirement
- Moral suasion
- Priority sector lending
- Macroprudential policy