The stability of the banking system

Modern banking systems have a number of tools designed to safeguard financial stability. These include deposit insurance and the role of the central bank as a “lender of last resort”— which means that, in cases of liquidity shortages, banks can obtain emergency funding from the central bank.

Public confidence in banks' ability to repay deposits is closely linked to how savers perceive certain key factors, many of which depend on the sound and prudent management of the banks themselves. These include the quality of a bank's assets (which is higher when investments are more profitable and carry lower risk), its liquidity, and its ability to absorb short-term financial imbalances. For this reason, banking activity is subject to a specific set of regulations that differ from those applied to other types of financial intermediaries. These rules govern aspects such as how banks are established, how financial crises are managed, the quality of banks' assets and risk concentration, and the level of capital banks are required to hold in relation to the risks they take on.

Over time, banks have expanded their role beyond the traditional business of taking deposits and issuing loans. Today, many also offer services linked to financial markets, such as the placement and trading of securities and wealth management. While this expansion into new markets and the development of innovative financial products provide customers with greater choice and access to more services, they also increase the risks and the overall complexity of the financial system.