Financial stability reflects the state in which the financial system-financial intermediaries, financial markets and financial market infrastructure-aids in smooth flow of funds between savers and investors in a structured and trustful manner. Given the importance of financial stability for the well functioning economy, ensuring stability of the financial system has emerged as one of the key responsibility of the central banks and regulatory authorities across the world. To ensure stability and resilience of the financial system it is necessary for the central banks to timely identify the vulnerabilities within the system and take mitigating measures so as to limit its spillover to other segments of the economy and keep the public confidence in the system.
Role of State Bank of Pakistan:
SBP plays a pivotal role in ensuring stability of the financial sector. As a central bank and banking supervisor it has been entrusted with responsibilities to “regulate the monetary and credit system of Pakistan and to foster its growth in the best national interest
” under the State Bank of Pakistan Act, 1956. Strategic plan “SBP Vision 2020
” also emphasizes strengthening the financial stability framework
. For that purpose, a separate department i.e. “Financial Stability Department (FSD)” has been formed. Apart from consolidating financial stability issues in FSD, SBP has also initiated working in several new and emerging areas aiming to address financial stability concerns encompassing (a) Designing of financial system stability framework, (b) crises management framework, (c) review and update of consolidated supervision framework, and (d) framework for identification and supervision of D-SIBs in Pakistan. SBP also plays its role in promoting safety and soundness of individual financial institutions; smooth functioning of payment systems and effective resolution of problem institutions.