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Addressing the Stability of the European Financial System

October 22nd, 2008 No comments

A distinctive feature of the last decade has been the drastic change wrought by globalisation and financial innovation on the world’s financial systems. With the worldwide shift toward financial systems based on global markets, attention is focusing on the need to redesign existing financial institutions and markets, corporate governance schemes and regulatory frameworks in order to achieve long-term stability of said financial systems. Interest in restructuring the region’s financial systems has intensified as a result of last century’s financial stress and the consequent need for architecture for the changing economy.
Fries and Lane (as cited in Berndt 2002) asserted that building a sound financial system is a prerequisite for economic development and ensuring long-term financial stability. The development of bond and equity markets has also been found as one important way of reducing financial fragility.

Gale (2001), in the similar line of argument as Fries and Lane, claimed that financial systems are crucial for the allocation of resources in a modern economy. They channel household savings to the corporate sector and allocate investment funds among firms. They allow intertemporal smoothing of consumption by households and expenditures by firms. They allow both firms and households to share risks. Read more…