Our more resilient financial system is better prepared to absorb, rather than amplify, adverse shocks, as has been illustrated during periods of market turbulence in recent years. juicebox. First, a stable financial system is a prerequisite for sustainable economic growth. Unless firms grow, there cannot be a sustainable long term growth of economy. Higher economic growth leads to higher tax revenues and this enables the government can spend more on public services, such as health care and education e.t.c. Growth in the economy matters for everyone – individuals, businesses, charities and the government. It might only become obvious when road conditions gets tougher and things start to go wrong. The simple response is that well-developed, smoothly operating financial markets play an important role in contributing to the health and efficiency of an economy. Therefore, a series of measures have been adopted aimed at strengthening the banks’ balance sheets, and increase their capacity to cope with unexpected losses and survive, preventing contagion to other institutions. Why shouldn’t we let a bank at risk of insolvency fail? In order to mitigate the economic declines to the extent possible and prevent depositors (who, at the end of the day, are the banks’ creditors) from assuming losses, as occurs when an institution  enters into resolution, government authorities have decided to “rescue” ailing financial institutions so they can continue their activity and avoid an economic collapse. Regardless of the cause leading to this situation, that fact that it is a bank entails some risks that extend beyond the institution. The financial crisis of 2007/08 showed that financial instability can severely affect people’s jobs and lives.  But we can’t forget that this was done to prevent depositors (who are also taxpayers) from having to assume part of the losses – something that is less likely to reoccur with the new regulations. Why are sound financial systems important? A stable financial system is one that can provide crucial services to households and businesses in good times and bad. Solved Expert Answer to Why is a stable financial system important to economic growth? So you can’t be 100% sure whether stable governments lead to economic growth or economic growth leads to stable governments. Real output is measured by Gross Domestic Product (GDP) at constant prices, so that the effect of price rises on the value of national output is removed.. It also creates the right environment for job creation and a balance of payments. 1. Business. Job creation An avid reader, books pile up on his night stand because of “the amount of materials you have to review nowadays to stay up to date.” This is why banks go through stress tests every year to make sure they have enough financial resources (called. To achieve this, financial markets require depth, access, efficiency and stability (World Bank 2016c). Thus for long run economic growth, it is very important to have a stable financial system.  Next in line are the creditors (for example, regular bond holders), who would have to give up their right to payment of all or part of the debt (commonly referred to as a savings levy). There is a strong positive relationship between financial market development and economic growth. The major drawback of all these measures is that these requirements translate in higher costs for the institutions and lower return ratios, which will probably lead to a decline in their lending activity and a negative impact on the real economy. 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