In the news: Following the publication of the ECB’s semi-annual financial stability report last Wednesday, Vitor Constancio, Vice President of the ECB, said of the eurozone that « financial stability has improved but remains fragile (…) due to weak growth and vulnerabilities in the banking sector. »
There is no consensus on how to define financial stability.
The ECB uses the following definition : « Financial stability is a situation in which the financial system—which encompasses intermediaries, markets, and market infrastructures—is capable of withstanding shocks, reducing the probability of a disruption in the financial intermediation process that would be significant enough to disrupt the optimal allocation of resources. ».
The BIS notes that, in a more narrow sense, it can be defined as » the absence of excessive volatility, stress, or crisis.«
While the idea is understandable in both cases, the definition itself leaves room for a great deal of subjectivity. In the latter definition, for example, what constitutes excessive volatility? At what threshold can we judge that there is « stress » or a « crisis »? These are questions on which there is no clear consensus, making it difficult to agree on a common, universal definition.
Julien P.
