Different Aspects of Financial Stability

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Bank performance

Bank performance is seriously contingent on interest rates due to the fact that there are numerous ways to affect net interest incomes through bank operations. One of the essential issues linked to net interest incomes, for example, is that the incomes from holdings and loans do not always respond to the needs of the bank and expenses that cover the outstanding debt or interest remunerated on deposits. The current evidence proves that the decline in total assets continues and has already reached a negative value (Akins et al., 2016). Nevertheless, banks do not usually apply any strategies to diminish the expenses linked to deposits. This mostly happens to owe to the nominal deposit rates and the overall consistency of bank strategies that revolve around the need to keep the deposit rates tending to zero.

Despite the potential drawbacks of negative interest rates, not all banks suffer from reduced interest incomes because of the differences in size. For instance, if a bank is relatively large (generally, if its assets are equal to anything close to $10 billion), the organization is going to have a stronger capability to reduce the expenses aimed at deposits (Horvath and Vasko, 2016). Smaller banks, on the other hand, are much more likely not to experience any changes because of the smaller deposit expenses. This ultimately means that financial stability is much more likely to be experienced by larger banks even under the condition where interest rates decrease drastically, and net interest incomes are not increased in any way.

In a situation where income ratios continue to grow under policy rates that are much more likely to cause negative outcomes, banks would have to revisit their interest strategy and ensure that the income ratio is going to increase irrespective of the growing tendency. Bank performance would be related to non-interest incomes only in the case where the majority of operations fulfilled by the bank would focus on security and capital gains. The existing evidence proves again that larger banks are much more successful in terms of dealing with this kind of fiscal pressure, as smaller banks do not have the capability to reduce non-interest expenditures quickly (Horvath and Vasko, 2016). For the idea of financial stability, this is a devastating concept because not all banks may be able to adjust their operations to cover the projected interest income decay. With no possibility of generating non-interest income under negative rates, the bank is going to deteriorate quickly. The latter statement is true for banks that rely on deposits and the smaller banks that do not have enough resources to sustain the changes.

Even though such adjustment could be seen as a means of keeping a bank’s income levels intact, the ultimate problem is that bank performance would hardly be justifiable in a similar situation in the future. Albeit there may be capital gains, they will not endure for a long time under negative rates. The most likely outcome, in this case, is that banks are going to respond to the negative rates by applying structural changes continuously and developing a framework that actually supports profitability and contributes to it. Financial stability, in this case, might suffer due to the weakened macroeconomy and the lack of respective policies that would affect the key drivers of interest rates (Zigraiova and Havranek, 2016). Some researchers suggest that negative rates could not affect a bank to an extent where it would lose its viability, but there are premises for less optimistic outcomes. Accordingly, the absence of an adequate monetary policy might negatively affect banks of any size on a long-term scale. Depending on the severity of the situation, banks should be able to develop monetary policies in response to negative rates.

Another important idea is that the financial stability of organizations that possess a lot of cash resources may be hindered by banks that operate negative deposit rates. The problem is that fixed investments make it harder for such companies to reduce short-term expenditures and protect their monetary assets. Depending on the size of cash-holdings, companies may be exposed to numerous different investment patterns, which also creates a dilemma for banks that mostly display negative interest rates. The possible investments made by banks in such cases negatively affect their performance because of the numerous differences in venture behaviors typical of businesses. The concept of financial performance is contingent on interest rates in banks because the latter become less consistent over time and generate changes that affect deposits on a corporate level.

Therefore, the issue of financial instability develops the quickest when banks choose to keep their negative rates and avoid the maintenance of loan supply. To take care of the decreasing interest rates and incomes, banks should highlight the idea that large cash-holdings reduce a company’s ability to respond to market changes swiftly and do not establish proper protection against the bank’s negative rates. This creates a situation where organizations overlook the bank’s recommendations and start venturing more into fixed assets, minimizing the occurrence of interactions with liquid asset holdings. Nevertheless, it is not always true for banks that negative interest rates reduce their profitability and create additional issues that cannot be overcome with the help of altered financial strategies.

The transformation of interest rates may be seen influencing bank behavior and making it harder for banks to improve their performance and stimulate the economy at the same time. As the evidence on the subject suggests, negative interest rates are reasonably hard to manage, especially under the condition where the bank is relatively small and does not possess the resources required to cover the negative interest rates on a long-term scale (Akins et al., 2016). The lack of sustainability makes it evident that monetary transmissions have to be revised in the case where a bank does not respond to the transformations adequately. Accordingly, capital gains leave room for long-term monetary policies that should protect banks from financial instability and provide other companies with interest rates that might serve as a competitive advantage for all parties involved.

BigTech and FinTech

BigTech and FinTech quickly developed into the two technological concepts that easily facilitate many operations that banks have to complete on a daily basis. Nevertheless, there are several opportunities and threats that have to be considered prior to implementation. First of all, BigTech and FinTech could prevent further development of the de-risking phenomenon and protect many smaller organizations from getting exposed to financial issues. One of the most well-known policies that have been introduced with the help of technologies is the ‘know-your-customer’ that focuses on the need for banks to develop strong relationships with their clients and partners (Stulz, 2019). The process of leveraging BigTech and FinTech also relies on the constantly decreasing smartphone and Internet prices that create more room for improvements related to the digitalization of the banking industry. The increasing rates of financial inclusion make the technologies at hand a perfect opportunity for banks across the world to ease access to official financial services.

One of the most popular modern approaches to the application of BigTech and FinTech is the ‘sandbox’ that suggests that every technology may be used to facilitate banking operations and procedures. Nevertheless, there may be regulatory barriers averting banks from sustaining their performance and a unified approach to relationships with clients. The traditional banking segment is much more focused on personal growth, which may be altered with the help of BigTech and FinTech, as more banks would learn from each other and share innovative approaches to the delivery of financial services. Also, new technologies may be seen as an effective way to achieve lucrative partnerships and develop a stronger bond between banks and customers.

The biggest threat represented by BigTech and FinTech is that the growing rate of cybercrimes could negatively affect the whole financial system and damage its integrity on a long-term scale. Accordingly, FinTech may be one of the key reasons why Central Banks are majorly ignoring the broader use of technologies. The lack of measures intended to protect banks against data breaches and other hacker activities makes banks reluctant to the development of new technologies because they mostly see tech innovations as a kind of threat that might destroy their success in a matter of several minutes (Vucinic, 2020). On the other hand, the cost of BigTech and FinTech suggests that cybersecurity could be an expensive organizational asset. The ultimate idea here is that banks from developing countries may not have enough resources to cover the infrastructure and capacity required to implement BigTech and FinTech properly. Many banks are currently concerned with how quickly startups launch their innovative products and do not pay enough attention to security measures. The logic here is that many companies do not follow the required regulations and tend to abuse BigTech and FinTech to an extent where the organization runs out of resources and struggles with protecting personal data carefully.

Another crucial concern that affects the utilization of BigTech and FinTech is the increasing rate of market competition that makes it harder for new entrants to promote their products to long-standing banks and financial organizations. The threat of monopoly affects the tech sector to an extent where several BigTech and FinTech companies may achieve unlimited authority, with all the other companies dragging behind with no power whatsoever. Another issue associated with the increased competitiveness is a severe upsurge in the number of companies that provide identical services and crowd the market without sustaining its demand. This is mostly true for developing countries and smaller banks that do not have the required capacity to maintain supervision- and regulation-related activities (Stulz, 2019). Regardless of how many banks finally choose to utilize BigTech and FinTech, these two concepts are here to stay, as the majority of technological innovations penetrate numerous other markets in addition to the banking sector as well. Proposed innovations should always suit the needs of companies and consumers. Otherwise, any other updates to the financial sector would become useless.

One of the key opportunities associated with BigTech and FinTech is that they can develop the banking sector to an extent where it would create new jobs and enhance organizational productivity while sustaining growth and innovation. In other words, new technologies could be used in the banking sector as a counterbalance measure intended to help banks find an equilibrium between the promotion of tech advances and the elaboration of necessary regulations. The full potential of BigTech and FinTech will be reached when banks are going to move beyond the perspective of mere financial regulations and attract more tech experts to the banking sector. Even if these technologies could cause another financial crisis, there is no viable reason to ignore them and let other industries benefit from technologies while letting the banks stagnate. The magnitude of changes that currently occur shows that a company has to have a lot of resources to deploy BigTech and FinTech and remain as effective as prior to the implementation.

The future of BigTech and FinTech in the banking sector is rather promising, but there are multiple assumptions related to how technology could drive innovation and improvements within less developed environments where there are not as many resources as in their developed counterparts. Each technology-related activity should be accurately regulated if banks expect to make sense of BigTech and FinTech and pave the way for more startups. Improved financial management is one of the biggest advantages that many companies yet have to discover in relation to the capital requirements typical of banks and their stakeholders (De la Mano and Padilla, 2018). In the future, there will be fewer risks associated with innovative technologies in the banking sector as BigTech and FinTech will be perceived as an adequate way to improve client-centered services and develop a better understanding of how technologies could be utilized to regulate all operations and protect customers at any cost.

Ultimately, the risks and rewards characteristic of BigTech and FinTech should be carefully reassessed by policymakers who expect to cover the potential consequences of the application of innovative technologies. None of the risks should be underestimated, no matter how small, because each opportunity linked to advancing discoveries is backed by several disadvantages that are going to destroy every competitive advantage if the organization comes unprepared. The existing limitations of consumer data might force policymakers to pay more attention to financial inclusion and the broad interests of local communities.

The impact of COVID19 on the banking sector

When discussing the impact of COVID19 on financial stability and the banking sector in general, it may be important to pay specific attention to how the global spread of the pandemic created obstacles for financial markets. The most common outcome for the majority of banks across the globe is the reduced effectiveness of operations, which means that COVID19 generates the need for additional assessments in the areas of bond spreads, stock prices, and credit ratings. The existing dynamics of fixed income and equity markets also make it evident that banks are going to face a series of smaller crises in the future if they do not respond to COVID19 outcomes with the help of revised prices and immediate actions aimed at restoring the past levels of performance (Eichengreen, 2020). Banks should regain their financial stability with the help of policy measures that would be first applied by central banks, as the latter has the resources to deploy such ‘pilot’ initiatives. In the long run, this would become the turning point for investors and clients, allowing them to decide if they want to continue the partnership with the current bank.

The pre-pandemic peculiarities of many banks are rapidly changing because of the broad sell-off that destabilized the market and forced numerous banks around the world to make questionable decisions to maintain their operations. Chinese banks met the least challenges, but some of the solutions they proposed to overcome the financial impact of COVID19 were too risky for other countries to replicate. The given differentiation makes it evident that the local banking sector became overly affected by the need to regain previous strength and make the best use of capitalization to improve the balance sheet as well (Ettmeier, Kim and Kriwoluzky, 2020). Stable credit ratings and funding may be hard to find during the pandemic due to the decreased CDS spreads and bank stock. The financial health of many borrowers weakened during the strongest phases of COVID19, drawing the attention of the banking sector to essential market attributes and elaboration of an environment where the pandemic would not have such a thorough influence on the banking sector.

Another concept characteristic of financial stability during the COVID19 pandemic is that credit rating activities began changing significantly due to the deflation of profitability. Irrespective of the past incomes and returns on assets, numerous banks across the globe faced a situation where they had to introduce drastic changes to facilitate change and revise operations in the best way possible. Negative outlooks received by the majority of banks worldwide make COVID19 an important factor in the process of rebuilding the banking sector in the middle of a pandemic. The biggest challenges are currently experienced by smaller banks that were not able to downgrade appropriately to restore their operations later. Irrespective of the ultimate scope pursued by a bank during the COVID19 pandemic, it remains evident that widespread downgrades all over the world significantly reduced financial stability and put a strain on bank assets and capabilities.

Compared to the pre-COVID19 conditions, banks now have more liquidity, but the impact of global financial crises is still majorly underresearched to make any conclusions regarding the presence of universal attempts to restore the pre-pandemic conditions. There is a need for additional supervisory ideas and stress tests that would protect banks from reduced returns on assets and make it easier for them to position themselves in line with the changes introduced by the potential crisis. In a sense, to restore financial stability, central banks might join their forces and act in a coordinated manner to alleviate the strains of potential liquidity in the future (Ettmeier, Kim and Kriwoluzky, 2020). Many modern banks show clear signs of improved resilience to economic slowdowns, but the case of the COVID19 pandemic also validates the idea that lengthy crises may be harder to evade even for those banks and organizations that anticipated the pandemic and its negative effects. The further prosperity of the banking sector depends on the ability of the banks to predict the influence of crises and capitalize on the existing resources partnerships instead of trying to resolve all issues individually.

The existing situation in the banking sector shows that no organizations are going to remain unharmed under the influence of COVID19. Compared to the crisis of 2007-09, the COVID19 pandemic became much more of a factor because it took over global economics much quicker and forced many financial organizations to stabilize by differentiation (Eichengreen, 2020). Even though some of the banks were able to restore their capitalization and profitability, the majority of banks worldwide are still engaged in the struggle or restoring the pre-COVID19 balance sheets. Negative revisions became typical of the banking sector due to the lacking funding conditions and low profitability of the proposed operations. The ability of many banks to align their operations against financial trends has been damaged by the COVID19 pandemic, as they have to downgrade now in order to discover additional financial prospects and overcome the challenges of the modern crisis. The riskiest segments of financial markets are still unrecovered, which also means that the long-term perspectives of the COVID19 pandemic in terms of financial stability are mostly negative.

It will be crucial for the central banks to support the global financial market by safeguarding their current operations and ensuring that the flow of credit still runs. Nevertheless, future activities should go beyond liquidity in order to help the financial sector overcome the consequences of the COVID19 pandemic effectively and not lose momentum. The fact that many large segments of the worldwide economy performed a complete stop due to the crisis shows that central banks have to exert joint efforts to revise the current fiscal policies and protect smaller banks and financial organizations from getting shredded by the post-effects of the COVID19 pandemic. Financial stability is going to be restored in the future, but imminent recovery plans should include sustainable growth options that would avert banks from slowing down their operations even during crucial worldwide-effect events such as COVID19.


Akins, B. et al. (2016) ‘Bank competition and financial stability: evidence from the financial crisis’, Journal of Financial and Quantitative Analysis, 51(1), pp. 1-28.

De la Mano, M. and Padilla, J. (2018) ‘Big Tech banking’, Journal of Competition Law & Economics, 14(4), pp. 494-526.

Eichengreen, B. (2020) ‘Coronavirus pandemic: Europe is once again forged in a crisis’, Intereconomics, 55, pp. 199-200.

Ettmeier, S., Kim, C. H. and Kriwoluzky, A. (2020) ‘Financial market participants expect the coronavirus pandemic to have a long-lasting economic impact in Europe’, DIW Weekly Report, 10(19/20), pp. 243-250.

Horvath, R. and Vasko, D. (2016) ‘Central bank transparency and financial stability’, Journal of Financial Stability, 22, pp. 45-56.

Stulz, R. M. (2019) ‘FinTech, BigTech, and the future of banks’, Journal of Applied Corporate Finance, 31(4), pp. 86-97.

Vucinic, M. (2020) ‘Fintech and financial stability: potential influence of FinTech on financial stability, risks and benefits’, Journal of Central Banking Theory and Practice, 9(2), pp. 43-66.

Zigraiova, D. and Havranek, T. (2016) ‘Bank competition and financial stability: much ado about nothing?’, Journal of Economic Surveys, 30(5), pp. 944-981.

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