Financial system and financial crises

In the stricter sense, the financial system comprises financial intermediaries (with the banks as the main players), financial markets as well as payment and securities settlement systems. In a wider sense, it also includes the organisation of financial market supervision and the legal framework including the accounting rules.

Financial crises are episodes with high volatility in the financial markets, liquidity problems and insolvency of significant financial market participants that can give rise to real economic effects. A financial crisis can occur as a result of destabilising developments at the macroeconomic level, for example, owing to balance of payments imbalances or unsustainable exchange rate regimes. Information asymmetries between individual market participants or destabilising patterns of behaviour, such as herding, also pose threats to the stability of the financial system.

A large number of financial crises have been recorded in industrial countries and emerging market economies since the 1970s. The financial crises that occurred in emerging market economies have proven that deregulation and liberalisation of the financial system need to go hand-in-hand with the development of an appropriate regulatory framework. In recent years, financial systems in industrial countries have had to weather a wide range of shocks such as the bursting of the "new economy" bubble, the terrorist attacks of 11 September 2001 and gross irregularities in the accounting practices of some major enterprises.