The Importance of Financial Stability
Ensuring financial stability is a paramount mandate of the Central Bank of Armenia alongside its commitment to price stability.
Given the importance of maintaining financial stability, especially highlighted after the global financial crisis in 2007-2008, ensuring financial stability in a number of countries has been established in law as one of the primary objectives of central banks. The entity responsible for ensuring financial stability in the Republic of Armenia is the Central Bank of Armenia (CBA), and this function is outlined in both the Constitution of the Republic of Armenia and the Law of the Republic of Armenia on the Central Bank of Armenia.
So, what is financial stability and why is it important?
The situation in which we have a strong and resilient financial system that provides the financial services we all rely on, even when under stress, we call financial stability. The goal of financial stability is not the stability of a single financial institution, but the stability of the entire financial system.
There are various reasons that justify the utmost importance of ensuring financial stability.
The financial system plays a vital role in facilitating economic activity by providing essential services to various economic entities: households, businesses, the government, and participants in the financial system itself. These services allow us to make various payments, save and invest, borrow when necessary, as well as insure us against various risks.
It is essential for individuals and businesses to have trust and confidence that banks, non-bank credit institutions and insurers will uninterruptedly offer these services. Moreover, they rely on the reliability and proper functioning of payment and settlement systems to ensure smooth transactions.
However, even when financial system appear to be stable, risks can still accumulate over time within the financial sector, companies, households, and investors. Financial stability may be disturbed both by processes inside the financial sector leading to the emergence of weak spots, and by negative shocks stemming from outside of financial system (e.g., macro environment). These imbalances or shocks can trigger a financial crisis.
Our policy aimed at ensuring financial stability reduces/mitigates the possibility of financial system failure which can disrupt the provision of financial services and result in severe negative consequences for the economy.
Hence, by ensuring financial stability we make efforts to enhance the overall economic welfare.