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Importance Of Financial System Essay

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THE IMPORTANCE OF THE FINANCIAL SYSTEM The development of a country’s financial system is of core importance for its economic growth. Nevertheless, the authors P. Haiss, H. Juvan and B. Mahlberg, have come forward in opposition to the widespread endorsement about the strong influence that an advanced financial system has on a country’s economic growth. They based their work considering the integration and liberalisation of financial markets that has taken place during the past thirty years, especially between European nations. The strategy followed by the EU has been to encourage free capital flow “as well as goods, services and labour across national borders, including interstate-banking and interstate branching: deeply integrating financial …show more content…

▪ Bad management of financial liberalization or innovation. Financial liberalization takes place when curtailments on financial institutions and markets are eliminated. And, on the other hand, innovation refers to the introduction of new financial instruments into the market. In the long term, beneficial outcome is achieve; however, in the short term, financial institutions might get incited to offer lends indulgently and in excess (credit boom). Besides, banks are aware that in case of bankruptcy they will be guaranteed by the government. Hence, “without a proper monitoring”, “banks take on greater risk than otherwise they would”. Thus, unprofitable loans accumulate and begin to depreciate. Financial institutions become unreliable so that they lack inflows and deposits shrink. “Fewer funds mean fewer loans and a credit freeze”, affecting both financial institutions and companies. This will also be forced to stop their investments, and furthermore, the overall economy

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