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What factors contribute to financial stability in the banking system in emerging countries?

Emerging countries encounter various challenges that affect their growth and development before achieving full economic stability. Aspects such as political conflicts can easily affect the stability of the currency resulting to situations such as withdrawal of investors from the country due to the fear of uprisings. From this realization, it is evident that governments in emerging nations attempt to put in place measures that can regulate financial activities through the adoption of monetary policies that instill discipline in borrowers and lenders. On the same note, financial institutions are expected to comply with the regulatory moves because of their close interaction with the populace and their ability to initiate change in the business environment. Given the income levels of individuals in emerging countries, many people rely on loans to engage in business activities. Market liquidation can affect the business environment, especially when borrowers fail to repay their loans. In their part, investors can liquidate the market by disposing their securities simultaneously after suspecting a financial risk emanating from the unpredictable market. Looking at the prospects that can accrue to a financial market, it is imperative for business players to put in place measures that can instill confidence in both local and foreign investors to realize the desired objectives.

Stable financial systems enable different stakeholders to engage in activities that promote positive interactions in the business environment. In such an environment, it is possible for individuals to connect with investors and strike business deals that encourage investments in an emerging country. Mostly, governments put in place measures that encourage foreign investors to explore available opportunities by initiating tax breaks, which allow the country to benefit from the external input. In many occasions, financial instability is viewed as a market disruption that alters positive interactions and the flow of investments from one point to another. From this perspective, financial stability is viewed as a role of the banking institutions to identify approaches that can be used to prevent any negative instances from taking place in the business environment. In this section, the study will explore existing research and identify the loopholes that should be sealed because of their impact on the outcomes of events in the financial environment. By promoting awareness regarding the impact of financial miscalculations in the workplace, individuals will understand the issues that contribute towards financial stability and their impact on the performance of banks in the world today.

The Banking System in Emerging Countries

In the early 1990s, the world was treated to a rise in significant economic disruptions that affected the ability of individuals to make informed decisions when reviewing available investment opportunities in the market. During this time, the internet was a new concept and people relied heavily on the mainstream media to make decisions based on their understanding of the financial market (Rey, 2015). Importantly, an increase in interest rates initiated by the banks discouraged individuals to borrow loans because of their fear of the various elements that distracted them from making any worthwhile decision during their interactions with other people in the market. Similarly, significant currency depreciations discouraged investors from exploring any opportunities in the emerging economies because of the lack of a consistent trend, which would guarantee results in the financial environment. From this perspective, it is imperative to note that continuous declines in the supply of credit has presented a certain level of difficulty for entrepreneurs struggling to meet the changing needs of their target audience.

Over the years, the private sector has established a healthy working relationship with the financial institutions with whom they have partnered to undertake significant projects revolving around the execution of ideas in the business environment. Notably, maintaining this relationship remains to be the biggest hurdle for any company manager because of the unanticipated challenges that may emerge in the business environment prompting an organization to delay its agreement with the financial institutions (Neaime & Gaysset, 2018). However, the modern corporate world has demonstrated the significance for loans in the market because of its ability to boost performance and enable organizations to achieve their desired objectives in the expected time frame. Lagging investments in the market can be realized through the input of financial institutions to facilitate payments and other related activities, which streamline operations in the business environment. For this reason, the banking institutions control a significant portion of the possible outcomes that can be realized in the world today.

Impact of Government Policies on the Financial Markets

Many governments put in place measures that address the challenges, which can occur in the business environment and disrupt systems. For example, the International Monetary Fund (IMF) can develop policy instruments to control inflation and avoid situations that could lead to the Great Depression. When the Great Depression occurred in the U.S., many countries developed policies that could cushion them during a similar event. During this period, many employees lost their jobs and families were unable to facilitate their mortgages, leading them to lose their houses (Aalbers, 2016). The number of homeless people increased during this time, as banks were not willing to lend money because of the inability of individuals to service their loans. From this observation, it is evident that financial institutions contribute to instability in the business environment because of various elements that lead to delays and other unfavorable results in the world today.

Macroprudential regulation streamlines the approaches that can be used to discourage investors from making decisions that may affect the overall outlook of the market. specifically, the policy aims at strengthening the relationship between financial institutions and their target audience, with a close focus on risks that can ruin the interactions. Galati and Moessner (2018) posit that the regulation could involve placing a cap on the loan to value ratio to encourage individuals to service their loans within the expected timeframe. In the same vein, the policy could touch on the debit to value ratio to control the movement of money from the financial institutions to the market. Some of the macroprudential tools that are widely used around the world include cap on leverage, levy on core liabilities, and liquidity coverage ratio to prevent a build-up of Non-Performing Loans (NPLs). Therefore, the decisions made by financial institutions contribute to the success of organizations in the business environment.

Many researchers have identified the significance of macroprudential tools and their impact on the lifestyles of individuals in the business environment. By focusing on their effectiveness, the scholars have insisted on the continued use of the techniques to cushion the market during bad times. For instance, when Spain introduced the tools in their market in 2009, the country was able to anticipate financial crisis and make decisions that encouraged investors to direct funds towards various business opportunities in their market (Koepke, 2019). from this perspective, it is imperative to observe the role of financial institutions and the impact of instability in the banking system on the outcomes in the world today. In the United Kingdom, financial institutions engaged in research to understand the consumer behaviors that contribute towards NPLs. In their findings, the banks mentioned that introducing a time-varying minimum funding base enabled different market players to focus on their activities and realize the leaks that lead to crisis in the business environment.

Emerging markets are susceptible to financial challenges because of their limited resources and ability to explore a wide range of techniques to curb the imminent problems. However, many banks in these countries have identified the importance of macroprudential tools because of their ability to cushion them from unanticipated risks that could hurt their economies (Blanchard & Summers, 2017). After the 1998 Russian financial crisis, many countries in the emerging markets made it a habit to adopt the macroprudential techniques to prevent any instances that could weaken their activities in the market. In this case, the tools enable the banking systems to establish a strong domestic financial market that handles different elements in the business environment. Even if a similar financial crisis to that of the Great Depression could recur in the global market, many emerging economies have put in place measures that will cushion them from the challenges that hinder their growth and development.

Implications of Macroprudential Techniques on the Market

Although existing information has indicated numerous benefits associated with the tools, it is imperative to note its impact on the growth and development of emerging markets. In this regard, macroprudential techniques should be considered as the last resort because of their ability to disrupt the market and affect the outcomes of events in the world today. In this regard, it has been realized that the tools should only be introduced in the market during a financial crisis to prevent any situation that could lead to the destabilization of the market. By understanding the outcomes in the world today, it is possible to discover the various elements that contribute to the stability of banking systems in the modern world. Anginer, Cerutti, and Peria (2017) opine that for a macroprudential tool to succeed in the financial market, the lending rates should be significantly lower to balance the outcomes and expectations held by different stakeholders. However, it is impossible for financial institutions to reduce their loan rates because of the possibility of default and insurance costs associated with the process of recovering the money from NPLs.

Influential financial institutions such as the IMF and Central Banks should control the process of price stability and maintaining a cap on interest rates to prevent situations where financial institutions can exploit the borrowers. Researchers have explored the relationship between macroprudential techniques and monetary reforms because of their impact on the financial outcomes in the market. Central Banks around the world have a key role in making decisions that cushion consumers from any form of exploitation that can affect their lifestyles. Monetary reforms should counter any financial imbalances that threaten the stability of the banking system and other processes in the business environment. Riasi (2015) posits that the banking institutions can explore the competitive advantage to reclaim the economy from a difficult situation through invoking various strategies that address the concerns held by different stakeholders. Besides, there is a need for the investors to feel confident when directing their funds to facilitate projects in an emerging economy. Hence, it is important for key financial stakeholders to indicate the processes that can be explored by individuals in the world today to stabilize the banking systems and promote investments within the emerging economies.

Risk Management in Financial Institutions

The discovery of the internet and other social media platforms appears to have reduced the risks associated with investments and other activities in the financial markets. Currently, it is easy to obtain information regarding the bets investment decision that can be made by an entrepreneur in the market. Although the influence of government policies appears to push financial institutions towards a certain path, it is possible for one to realize the influence of the various elements and their ability to determine the credit risks that can affect an organization. Importantly, domestic debt should be controlled by banks to help the government avoid any form of liquidation that can hurt the economy. In the same vein, the foreign debt should not exceed half of the national resources because of the possibility of instances that limit the repayment capabilities, leading to the introduction of intervention measures in the business environment.

Central banks around the world are usually concerned about the tendency of commercial banks to lend excessive loan packages to individuals. Inflation exists when the market is uncontrollable within the system. From this observation, it is evident to observe that many emerging economies are trying to improve their fiscal policies because of the ability of individuals to manipulate their relationship with the financial institutions. However, given the exposure of the banking systems to unreliable interest rates and exchange rates, there is a need to regulate the market by imposing measures that focus on recovering bad performing loans from borrowers (Chaibi & Ftiti, 2015). Currently, financial institutions rely heavily on risk assessment processes to quantify the challenges that can accrue during their interactions with clients in the business environment. Even though the internet has improved the bank’s ability to curb non-performing loans, it is imperative to observe the increasing impact of maintaining a healthy relationship with borrowers.

Despite the reforms introduced in the banking system to curb NPLs, problems still emerged because of the inability of the financial institutions to obtain data regarding their borrowers who used multiple entries in the initial stage of data collection. Risks associated with possible liquidation hinder the banking systems in emerging economies to focus on solving the needs of individuals in the business environment. Limited trust between the financial institutions and the borrowers can contribute to possible instability cases between the two because of the ability of individuals to seek other options that can disrupt the market (Carrick, 2016). Transferring the credit risk to the consumer by imposing high interest rates hinders growth and development in developing nations that could have a significant impact on the economy. Borrowing money should be an easy task that requires individuals to reach out to the specific authorities and initiate a conversation that highlights the processes, which can affect the outcomes of events in the market. Therefore, introducing stringent financial measures can affect the market and expose banking systems to a list of challenges, which affect their operational performance in the business environment.

Fiscal Intervention Measures

In any economy, factors that can disrupt the stability of the financial market are often approached in a certain manner that informs individuals about the probable measures that can be used to cushion the corporate world. During the Great Depression, many organizations relieved their employees from work-related duties because of their inability to realize their desired objectives in the business environment. Understanding the various elements that can be used to approach the market require company managers to identify the best techniques, which are applicable in the market (Marcelin & Mathur, 2016). Bank deregulation serves as a constant reminder to financial institutions that engage in illegitimate banking practices that could affect economic growth in emerging nations. However, changing the scope of monetary policies has a significant impact on the measures that can be used to address different issues that affect the outcomes in the modern business environment (Kim, Kim, H., & Lee, 2015). Domestic interest rates appear to be influenced by the potential growth in the economy and ability of organizations to overcome situations that affect the perspectives of individuals in their immediate environment. Therefore, there is a growing need for individuals to focus on the deliverables that can be achieved through the execution of tasks in the financial world and how they can contribute to the stabilization of banking systems in the global market.

Conclusion

By promoting awareness regarding the impact of financial miscalculations in the workplace, individuals will understand the issues that contribute towards financial stability and their impact on the performance of banks in the world today. In many instances, individuals engage in various activities to understand the issues that can be explored to overcome various challenges in their immediate environment. From this segment, it is easy to identify the numerous implications that monetary policies have on the financial stability of banking systems in the world today. By exploring the relationship between financial institutions and borrowers, it is possible to establish the approaches that can be used to understand the behavior of consumers in the market. In the subsequent sections, the study will explore the various elements that affect the financial stability of banking systems in emerging economies by obtaining data from relevant stakeholders.

 

 

References

Aalbers, M. B. (2016). The financialization of home and the mortgage market crisis. In The Financialization of Housing (pp. 40-63). Routledge.

Anginer, D., Cerutti, E., & Peria, M. S. M. (2017). Foreign bank subsidiaries’ default risk during the global crisis: What factors help insulate affiliates from their parents? Journal of Financial Intermediation29, 19-31.

Blanchard, O., & Summers, L. (2017). Rethinking stabilization policy: back to the future. Peterson Institute for International Economics8.

Carrick, J. (2016). Bitcoin as a complement to emerging market currencies. Emerging Markets Finance and Trade52(10), 2321-2334.

Chaibi, H., & Ftiti, Z. (2015). Credit risk determinants: Evidence from a cross-country study. Research in international business and finance33, 1-16.

Galati, G., & Moessner, R. (2018). What do we know about the effects of macroprudential policy? Economica85(340), 735-770.

Kim, B. H., Kim, H., & Lee, B. S. (2015). Spillover effects of the US financial crisis on financial markets in emerging Asian countries. International Review of Economics & Finance39, 192-210.

Koepke, R. (2019). What drives capital flows to emerging markets? A survey of the empirical literature. Journal of Economic Surveys33(2), 516-540.

Liu, C. P., Chen, A. S., & Lin, H. F. (2016). Do bank regulation and supervision stabilize the banking system? A cross-country systematic risk analysis. 財務金融學刊24(2), 55-88.

Marcelin, I., & Mathur, I. (2016). Financial sector development and dollarization in emerging economies. International review of financial analysis46, 20-32.

Neaime, S., & Gaysset, I. (2018). Financial inclusion and stability in MENA: Evidence from poverty and inequality. Finance Research Letters24, 230-237.

Rey, H. (2015). Dilemma not trilemma: the global financial cycle and monetary policy independence (No. w21162). National Bureau of Economic Research.

Riasi, A. (2015). Competitive advantages of shadow banking industry: An analysis using Porter diamond model. Business Management and Strategy6(2), 15-27.

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What factors contribute to financial stability in the banking system in emerging countries? . (2022, August 18). Essay Writing . Retrieved September 27, 2022, from https://www.essay-writing.com/samples/financial-stability/
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What factors contribute to financial stability in the banking system in emerging countries? . [online]. Available at: <https://www.essay-writing.com/samples/financial-stability/> [Accessed 27 Sep. 2022].
What factors contribute to financial stability in the banking system in emerging countries? [Internet]. Essay Writing . 2022 Aug 18 [cited 2022 Sep 27]. Available from: https://www.essay-writing.com/samples/financial-stability/
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