RBI research shows banking stability linked to financial stability

The Reserve Bank of India on its website has posted a working paper titled "Banking stability-A precursor to financial stability. This paper shows how the issue of financial stability is closely linked with banking stability. This is especially true in bank dominant financial systems like India.

 RBI research shows banking stability linked to financial stability

Their research also showed that banking stress could explain around 33 percent variability of stress in financial markets. Reuters

According to RBI website: "Though the stability of the banking sector gets affected positively or negatively with the conditions prevailing in the financial market and the real economy; ultimately it determines as to what extent financial stability is ensured in the economy by its ability to absorb the shocks. Stability of the banking sector may, therefore, be treated as a forerunner of financial stability in an economy."

The paper written Rabi N Mishra, S Majumdar and Dimple Bhandia. While Mishra is the Regional Director, Lucknow, Dimple Bhandia and S Majumdar are General Manager and Director in the Financial Stability Unit (FSU) of Reserve Bank of India (RBI), respectively.

There are a number of major findings, for instance the paper establishes a link between banking stability and financial stability. According to their research when there was continued financial stability it improved banking stability. And thus it enabled the banking sector to absorb shocks during times of crises, hence it minimised the impact and helped the economy to bounce back with minimum time lag.

Their research also showed that banking stress could explain around 33 percent variability of stress in financial markets. While the financial markets could explain only 17 percent of variability in banking stress.

To read the whole paper visit here.

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Updated Date: Dec 20, 2014 15:20:40 IST