The importance of Financial Stability
The financial system plays a critical role in the economy. It enables the financial intermediation process which facilitates the flow of funds between savers and borrowers, thus ensuring that financial resources are allocated efficiently towards promoting economic growth and development.
Financial stability describes the condition where the financial intermediation process functions smoothly and there is confidence in the operation of key financial institutions and markets within the economy.
Financial instability and its effects on the economy can be very costly due to its contagion or spillover effects to other parts of the economy. Indeed, it may lead to a financial crisis with adverse consequences for the economy. Hence, it is fundamental to have a sound, stable and healthy financial system to support the efficient allocation of resources and distribution of risks across the economy.
One of the main objectives of central banks is to promote and maintain monetary and financial stability as it contributes to a healthy economy and sustainable growth. Bank Negara Malaysia discharges the responsibility for promoting a sound and efficient Malaysian financial system by preserving the soundness of financial institutions and the robustness of the financial infrastructure to withstand adverse economic cycles and shocks, thereby preventing inordinate disruptions to the intermediation process and maintaining confidence in the financial system. This is primarily achieved through the regulation and supervision of the licensed financial institutions, by ensuring the continued reliability of major payment and settlement systems, and actively contributing to the development of efficient financial markets.
The Bank also remains vigilant to new emerging trends and challenges to the Malaysian financial system which could undermine financial stability by devoting significant resources towards instituting robust surveillance processes which aim to identify vulnerabilities and support pre-emptive actions to prevent systemic disturbances.