Financial stability

The globalisation of market and the international dimension of financial activities have contributed to the system's increased efficiency, but also to the intensity of its disturbances and the quickness of their transmission. This ease of contagion makes financial systems more vulnerable and the consequences of these shocks are even harsher on the real economy, as demonstrated by the crisis in the first decade of this century.

Financial instability could be defined as the situation in which economic activity can be affected by fluctuations in the price of financial assets or by the financial inability of agents to fulfil their obligations.

Preventing the occurrence of episodes of financial instability is a task that requires the involvement of all the actors in the system, including regulators, banks, financial market traders and even the consumers of financial products and services.

Crisis management

The authorities may adopt various measures to manage crises and counteract disturbances, for example:

• Supervisors can demand that a financial institution demand additional funds from shareholders or impose reorganisational measures.
• Central banks can adopt measures to restore normal liquidity in money markets or to ensure the proper functioning of market infrastructures, such as payment systems.
• Governments can finance credit institutions or approve emergency legal provisions.

In the framework of the European Union (EU) there are crisis management mechanisms that ensure the exchange of information, as well as co-operation procedures among the various supervisory authorities, the central banks and the Ministers of the Economy.

The EU's framework of financial stability is complemented by other national instruments, such as financial stability committees, co-operation agreements and other formal and informal co-ordination instruments.

National supervisors and authorities maintain contact and permanent collaboration, and participate in European organisations that are involved in the prevention and management of financial crises. In our country in particular, the organisation that enables the flow of information between the Government and the supervisors is the Financial Stability Committee (CESFI), made up of the Ministry of Economy, Banco de España, the National Securities Market Commission and the Directorate General of Insurance and Pension Plans.

Roles of the CESFI

The CESFI meets at least twice a year and whenever convened by its chairman in connection with the management of a financial crisis with a potentially systematic impact. The organisation promotes:

• The exchange of information and analysis in the areas of financial stability and crisis prevention and management.
• The strengthening of instruments for maintaining financial stability, including contingency plans and performing simulations and stress tests.
• The improving of collaboration in the area of financial stability and the prevention of potentially systematic crises with other European Union authorities.