Financial stability is a broad concept that has two facets, an economic one in which financial systems are analyzed and a business one in which the solvency of organizations is analyzed, both important.
1. Financial stability from the perspective of the economy
According to Schinasi (p.3) financial stability means more than the simple absence of crisis. A financial system can be considered stable if:
- facilitates the efficient allocation of economic resources, both geographically and over time, as well as other financial and economic processes (such as saving and investing, borrowing and borrowing, creating and distributing liquidity, setting the price of assets, and ultimately, accumulation of wealth and growth of production); assesses, values, allocates and manages financial risks, and maintains its ability to perform these essential functions even when faced with external shocks or an increase in imbalances.
Therefore, since the financial system contains a number of different but interrelated components - infrastructure (legal, payment, settlement, and accounting systems), institutions (banks, securities firms, institutional investors), and markets (stock, bond, money and derivatives) -, the alteration of one of the components could weaken the stability of the entire system. However, if the system works well enough to carry out its main enabling functions, even when one component experiences problems, these will not necessarily constitute a threat to global stability.
Financial stability does not require that all parts of the financial system function at their maximum or near maximum at all times. But a stable financial system has the capacity to limit and resolve imbalances, in part through self-correcting mechanisms, before they trigger a crisis, and allows the country's currency (fiat currency) to perform its role as a medium for transactions, a unit of account and store of value (financial stability and monetary stability overlap).
Finally, a financial system can be considered stable if shocks are not expected to harm economic activity. In fact, the closure of a financial institution, increased volatility, or a significant correction in financial markets can be the result of increased competition or the absorption of new information, and can even be signs of good health.
2. Financial stability from a business point of view
Piñeiro, de Llano and Álvarez (p.152), within the business solvency analysis, indicate the following levels of financial balance:
2.1. Maximum financial stability
Where the financing is exclusively owned, the net equity covers the asset investments.
2.2. Financial stability or normal financial situation
Where the fixed liability (net equity, more payable in the long term) covers all the fixed assets and part of the current assets. In the same way, it can be pointed out as the situation in which current assets are higher than current liabilities. This equilibrium situation is the one desirable for every businessman, but daily practice indicates that tensions, imbalances, or financial imbalances generally arise.
2.3. Financial instability
Characterized by the impossibility of meeting short-term business obligations. Situation that may be momentary or occasional, but if it persists, it may lead to the disappearance of the company due to inability to pay, although it is possible to try to solve an unfavorable economic situation taking into account the situation called suspension of payments, which consists of a precautionary measure that is intended to guarantee business recovery if its viability is demonstrated.
2.4. Technical bankruptcy
Characterized because the payment obligations exceed the available equity, due to accumulation of losses. Likewise, it must be remembered that in unfavorable situations, the sales of companies depend more on the negotiating capacity of the buyer and the seller than on their own value or capacity, which can further accentuate the actual bankruptcy situation.
Bibliography
- Piñeiro Sánchez, Carlos; from Llano Monelos, Pablo and Álvarez García, Begoña. Financial management: advanced decision models with excel. Delta Publications, 2006.Schinasi, Garry J. Preserving Financial Stability. International Monetary Fund, 2006.
