Issues in Financial Stability Assignment

ISSUES IN
FINANCIAL
STABILITY

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Question 1. Effect of lower interest on bank's performance and financial stability...................3
Question 2. Analyse the competitive threat of Big-Tech and Fin-tech companies for banking
intermediaries and the implications for financial stability..........................................................6
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
The term financial stability can be defined as a kind of financial system which dissipates
the financial imbalance which raise into financial market (Horvath and Vaško, 2016). Basically,
the main objective of this is to make financial activities stable as much as possible. There are
various kind of issues in the aspect of financial stability such as hyper inflation, stock market
crash etc. The project report covers about the issues of financial stability. As well as in the
report, effect of lower interest of bank's performance is mentioned. Along with in the end part of
report, competitive threat of Big Tech and Fin tech companies is also discussed in broad sense.
MAIN BODY
Question 1. Effect of lower interest on bank's performance and financial stability.
The banks are institutions who involve in the process of collecting savings from public
and providing financial assistance to needed people and small businesses (Hak, Fitzpatrick,
Bishop, 2014). In this case, the bank's earning depends on the interest which they get from the
loan. If interest rate is higher then it will be beneficial for banks to earn more profit. While on the
other hand, if interest rate is lower then it will be beneficial for public who get loan from bank
and it will be loss to banks. Basically, the interest rate is decided by central bank of a particular
country. It is not under control of banks as well as central bank also plays an important in
determination of limit of loan which will be provided by bank to customers. Basically, the
central bank plays an important role which are as follows:
 Crisis manager- The central banks act as crisis manager for banks because they provide
guidance to overcome from financial issues. Like some banks face the issue of lower
profitability and in this case, the central bank act as mediator to bring out banks from
problem of low profitability.
 Sets the limit of loan- The another role of central bank is to setting the limit of loan for
banks. As well as the banks should follow this limit of loan (Holzmann, Palmer and
Robalino, 2012).
So these are some common roles which are being played by central banks to the all banks of
country.

Herein, below effect of lower interest rate on bank's performance is mentioned below that is as
follows:
 Agency problem- This can be defined as a kind of conflict of interest between an
organisation's management and stakeholders (Mohan, 2012). In the aspect of banks the
agency problem is related to the lack of investment such as deposits, fixed deposits etc. as
well as lower level of capital. In broad sense, this issue raise in banks due to lower
interest because if bank's interest rate is low then people will not make investment in
bank. This is so because due to lower interest rate bank will not be able to pay higher
return and it overall results in lack of deposit that leads to an agency issue for banks.
 Improves bank liquidity and net worth- This is a positive impact of lower interest on
bank's performance (Ellis, Haldane and Moshirian, 2014). This is so because banks
depends on short term funding and due to low interest rate, their liquidity position
becomes strong. It is so because if interest rate will low then banks will require to pay
lower amount of interest to pay on deposits. This will lead to improvement of liquidity
position of banks. As well as due to this their net worth also enhance because strong
liquidity position leads to effective financial position.
 Risk less assets becomes less attractive- Another impact of lower interest rate is that it
makes risk less assets less effective. This is so because securitization of loans need results
in the assets higher return for investors. Along with it also enhance the bank's lending
capacity. So this is the main impact of lower interest rate which makes lower risk assets
less effective.
 Minimise the adverse selection issues in credit market- Additionally, the low interest rate
also effect to banks in reducing the issues regarding to selection in the credit market. This
is so because due to lower interest rates, banks get able to assess the alternative in the
credit market and on the basis of it choose an option (Tarullo, 2014). Basically, in the
credit market if banks choose any wrong option then it may lead to huge lose because due
to higher interest rate they may be tend to pay high interest amount. On the other hand, in
case of lower interest rate banks will be able to chose a beneficial option in credit market.
 Decrease screening by banks- The lower interest rate effects to banks in decreasing the
screening by banks (Moenjak, 2014). In other words, due to low interest rate banks get
able to assess about existing and potential customer's regulatory and black lists.

 Foster bubbles in assets price and credit- The lower interest rate also impact to price of
assets and credits. This is so because on lower interest rate customers will demand more
for loan which will lead to foster or increasing in the credits for company. As well as
assets price of bank is also enhance due to low interest rate.
 Apart from above impact of lower interest on bank, there are some other effects on bank's
performance such as nominal deposit rate can not be minimised below zero in the
absence of eroding banks' customer basis (Lee and Hsieh, 2014).
 As well as lower interest rate can reduce the profitability of bank. This can be understand
by an example, that there is a bank whose interest rate is low then they will not be able to
offer more loans to their customers. The main reason behind this is that customers make
invest only in those banks whose interest rate is high. Along with due to low interest rate,
banks will get less revenue on their loans. On the other side of it, this can be beneficial
for customers too because they can get loan on lower interest.
So these are the impact of lower interest on the performance of banks which is negative and
positive for banks. In general, low interest rate is being considered as a lose for banks because
due to this their profitability get decreased.
Apart from the impact of lower interest rate on banks below its impact on financial
stability is mentioned such as:
In the aspect of financial stability, the interest rate is very important because if interest
rate will low then there can be instability in financial market. Basically, the interest rate is the
basis of a financial market and if it will change then there will be no stability in financial market.
Below some impacts are mentioned such as:
 Liquidity issues- If interest rate changes from high to low then it can effect to the
financial market because there will be too much issues such as liquidity issue (Nakajima,
Sawamoto and Taguchi, 2016). Due to this, there will be shortage of liquidity and it can
lead to some other problems like payment of day to day activities. As well as this can be
reason of instability of financial market because liquidity is the key aspect of finance.
Hence, lower interest rate effect to financial stability because of lower liquidity.
 Financial crises- The lower interest rate can also lead to financial crises because due to
this financial institutions may face problem of lower profitability. This can become

reason of financial crises for financial institutions. Along with this can become a reason
of instability in the financial markets.
 Could effect financial institutions' solvency- Along with above impact of lower interest
rate on financial stability, there is an another impact on financial institutions which is
issue of solvency (Nelson,2018). In other words, due to lower interest, the solvency
capabilities of financial institutions can be decrease and due to this needed people won't
be able to get financial assistance. As well as this can become a cause of instability in the
financial markets.
 Higher inflation rate- If interest rate will be low then it can impact to inflation rate and
the interest rate may fluctuate more. Due to this there will be instability in the context of
financial market.
So these are the impact of lower interest rate on the financial stability which is effecting in a
negative manner. In this case, the reserve bank should play a significant role so that interest rate
may climb and can stop at a balancing mode.
Question 2. Analyse the competitive threat of Big-Tech and Fin-tech companies for banking
intermediaries and the implications for financial stability.
The competition from big technology companies and financial technology can make
pressure on the profitability of financial companies. As well as can lead them to take higher risk
with an objective to protecting the margins (Ülgen, 2013). In the terms of analysing benefits and
threats incurred due to innovation of technology in financial sector, it can be found that more
effective financial system can develop due to big tech and fin-tech. Though, if financial
companies face tough competition, then they can increase their credit risk as well as market risk
for getting profits. Additionally, the Big tech and Fin tech can impact to financial stability by
making change in market structure in financial services. As accordance to financial stability
board's report, the term market structure can be defined as interrelation of organisations in a
market which effects the ability of profit generating.
Basically, the Big tech' s competitive effect on financial institutions can be more then to
the fin- tech. It should not be surprising provided that big-tech has wide range of established
customers. The companies like Apple, Amazon, Facebook can also use the customer's data which
is generated by different kind of sources. This is not only that their respective size allow them to

provide cheap credit which is done by the banks. As well as it allows them to court innovation
whilst getting scale with the speed. The financial stability board also analysed that cross
subsidization can allow to the Big tech companies to run their activities at lower margin and
achieve higher market share. On the other hand, the big tech firms can present a source of higher
competition for existed financial companies. As well as a higher market share of Big tech
company can be associated to the more concentration with change in composition.
As accordance to the financial stability board, the big tech companies have the threat to re
structure the infrastructure of financial services in an effective manner in compare to the fin tech
companies (About competitive threat of Big-Tech and Fin-tech companies, 2019). For example,
how will be a big tech company integrate deposit taking or financial suggestions in exist
platform? Basically, there is no doubt that big tech firms are well settled in terms of bringing
innovative technologies to the market and their access in many private lives. As well as many
users of Big tech companies are using services which overlay platforms they already apply to
communicate to the friends and family on a regular basis. So these are some common
competitive threat to the big tech and fin tech companies for banking intermediaries.
Apart from it, the financial stability board has warned to the banks who have too much
fear from the impact of competitiveness of big tech firms in the financial services. The policy
making body are monitoring actively to the market development of fin tech as well as their
potential impact for the financial stability.
While the FSB sees the relation between financial institutions and fin tech companies as
complementary and cooperative in nature and threat raised by Big tech companies can not be
availed. As per the analysis of financial stability board, the financial innovation can influence
market structure in financial services by various kind of channels such as:
 The entrance of big tech companies with the strong established networks and large data
achieved a significant impact on financial services space, specially in terms of payments.
Along with in some conditions like credit, insurance etc. Basically, the big tech players
can provide low cost services from a time when they used data obtained by a wide range
of business activities and services. As well as it is in return can impact to the existing
markets.
 Additionally, the financial organisations depends on the third party service companies for
the objective of data provision, cloud services etc. This is so because, it is not possible for

financial institutions to access all the data about customers. In the aspect of traditional
financial companies and fin tech firms if they relay on third party services providers then
this can increase the time. Along with the systemic operations and cyber security risk can
raise if financial institutions fail to manage the risk linked with the third party.
 Additionally, the services providers like fin tech credit and payment that can effect
market and banks. As well as in further time, the fin tech companies can raise the
efficiency of financial services.
Eventually, the financial service board is evaluating the activities of third-party service
providers. This is so important for not only to the technology companies and financial
organisations but also crucial for regulators all around the world. The Basel committee of
banking supervision, international organisation of security commission are evaluating the
implementation of big tech and fin tech on the financial organisations and stability. As well as
the financial innovation network is assessing the market of third-party services which contains
lock in risk and issues related to cross border. Apart from it, the financial innovation network is
focusing in the activities of big tech companies in the finance.
The banks have tough competitive pressure of technology companies which forces to
operational risk. On the basis of financial stability board, this pressure can be become more
complex because of below mentioned three reasons which are as follows:
 The new techniques and technologies are being introduced in recent few years and
motivation given by the banking can change the competitive dynamics in short time
(Closa and Maatsch, 2014). In other words, due to the more advanced techniques in the
context of banking sector can lead to the higher competition level. As well as in further
time, it is estimated that technology will enhance more rapidly and by this competition
will be more complex.
 Along with changes in the model of business can incur more speedily in compare to
previous time when big tech companies were active. As well as this change is
successfully involved in the traditional financial services.
 Apart from it, the technology make focus on new providers in the case where they are
closely aligned in the firms' activities. As well as can need an advanced dimension of risk
regarding to the operations.

In present scenario, the financial stability board's report stated that major financial institution are
not depended on the data received from third party. As well as on the basis of report of financial
stability board, in the aspect of some other industries this is predicted that reliance on third party
companies will increase in upcoming time.
So these are the threat of fin tech and big tech companies in context of banking intermediaries.
Majorly, the big threat is associated to the dependencies of financial institutions on the third
parties companies and due to this privacy about customer's information can be availed. As well
as in the case of financial stability, this is effecting in similar manner same as the banking sector.
Though due to the fin tech and big tech companies, it becomes easy to customers to use the
services but in the aspect of financial stability, this is effecting negatively to stability (Cihak,
Feyen and Levine, 2012).
CONCLUSION
On the basis of above project report it has been concluded that in the context of financial
market, the stability is necessary. In the absence of proper financial stability, this can be difficult
to a country's economic sector. Basically, there are a wide range of factors which are impacting
to the financial stability. In the project report, these issues are concluded in broad sense as well
as its impact on the companies is also mentioned. Apart from it, in the absence of proper
financial stability this can difficult for the financial institution to operate their activities at the
global level.
The first part of the project report covers about impact of lower interest rate on the
performance of bank. As well as its effect on the financial stability. The report covers some
effect on the performance of bank such as liquidity issues, agency problems etc. While in the
second part of the project report, competitive threat for the financial intermediaries due to
financial technology companies and big technology companies. Further the report concludes
about the impact on the financial stability of fin tech and big tech companies. So overall, the
project report covers all the issues in aspect of financial stability.

REFERENCES
Books and journals:
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Financial Stability. 22. pp.45-56.
Hak, D .J., Fitzpatrick, D., Bishop, J. A., Marsh, J. L., Tilp, S., Schnettler, R., Simpson, H. and
Alt, V., 2014. Delayed union and nonunions: epidemiology, clinical issues, and
financial aspects.Injury. 45. pp.S3-S7.
Holzmann, R., Palmer, E. and Robalino, D., 2012.Nonfinancial Defined Contribution Pension
Schemes in a Changing Pension World: Volume 2 Gender, Politics, and Financial
Stability. The World Bank.
Mohan, R., 2012. Growth with financial stability: central banking in an emerging market. OUP
Catalogue.
Ellis, L., Haldane, A. and Moshirian, F., 2014. Systemic risk, governance and global financial
stability.Journal of Banking & Finance. 45. pp.175-181.
Tarullo, D. K., 2014. Financial stability regulation. In Dodd–Frank Wall Street Reform and
Consumer Protection Act: Purpose, Critique, Implementation Status and Policy
Issues(pp. 59-82).
Moenjak, T., 2014. Central banking: theory and practice in sustaining monetary and financial
stability. John Wiley & Sons.
Lee, C .C. and Hsieh, M. F., 2014. Bank reforms, foreign ownership, and financial
stability.Journal of International Money and Finance. 40. pp.204-224.
Nakajima, Z., Sawamoto, K. and Taguchi, H. eds., 2016. Financial Stability in a Changing
Environment. Springer.
Nelson, B., 2018. Financial stability and monetary policy issues associated with digital
currencies. Journal of Economics and Business. 100. pp.76-78.
Ülgen, F., 2013. Institutions and liberalized finance: is financial stability of capitalism a
pipedream?. Journal of economic issues. 47(2). pp.495-504.
Closa, C. and Maatsch, A., 2014. In a spirit of solidarity? Justifying the European Financial
Stability Facility (EFSF) in national parliamentary debates. JCMS: Journal of common
market studies. 52(4). pp.826-842.
Cihak, M., Demirgüç-Kunt, A., Feyen, E. and Levine, R., 2012. Benchmarking financial systems
around the world.
Online
About competitive threat of Big-Tech and Fin-tech companies. 2019. [online]. Available
through: <https://www.forbes.com/sites/civicnation/2019/08/06/how-parties-but-not-
those-kinds-of-parties-will-change-the-fabric-of-our-democracy/#69676cf7409c>