Financial stability, a check-over for the banking sector
Driving safely means having a reliable and well-maintained car. But the roads need to be good and conditions favourable as well. It’s the same with the banking sector. If a bank is to act as an intermediary (channelling funds from savers to investors) it has to be solvent. But that isn’t enough: is the road – the economy – in good condition? Is there enough financial stability to move forward? Grab your headphones and click to find out!
“Although today we’re looking more at the banking sector, the risks and vulnerabilities identified in the Financial Stability Report are relevant to the economy as a whole; they also affect households, firms, the non-bank financial sector (investment funds and insurance companies, for instance) and the public sector.”
How does a bank work? And how do we make sure that the banking system overall is stable?
Banking is not comparable to any other sector. From the purpose of its business (managing money) to the role it plays (channelling money from savers to investors to grow the economy and employment), the banking business operates very differently.
And while it is exposed to some common risks found in other sectors, such as credit risk (non-payment by customers, in the case of banks, by borrowers) or operational risk (failures in internal processes and nowadays also cyber threats), some risks are exclusive to banking.
One example is liquidity risk: banks use the money deposited by savers to grant mortgage loans to households and other long-term loans to firms. But as savers can claim their money back at any time, the bank has to have enough liquid assets, i.e. assets it can sell easily if it needs to cover any possible outflows of funds.
Banking is key to ensuring financial stability, but the sector also relies on this stability to be able to operate and intermediate in the economy. This is why the Banco de España gives such prominence to banking in the Financial Stability Report that it publishes in spring and autumn each year.
How do we know that a bank is solvent, that it can absorb losses without jeopardising its operations? How is the banking sector affected if certain risks materialise? And, aside from how these banking risks could affect the economy, which vulnerabilities in the economy represent a further risk to our banks?
Join Alejandro Ferrer and Irene Roibas as they guide us through the world of financial stability, whose risks and vulnerabilities affect not just the financial sector, but also households, firms and general government. Because when it comes to our economy, we’re all travelling along the same road.
Notes
The podcast was recorded in the banking hall at the Banco de España’s Cibeles headquarters. Visitors can access a range of our services in the banking hall, where they can admire its distinctive Art Deco clock and the magnificent stained-glass skylight overhead.
