Financial Outlook of the OIC Member Countries 2017
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2.4 FINANCIAL STABILITY
The importance of financial stability is highlighted by the World Bank as following: ‘A stable
financial system is capable of efficiently allocating resources, assessing and managing financial
risks, maintaining employment levels close to the economy’s natural rate, and eliminating
relative price movements of real or financial assets that will affect monetary stability or
employment levels. A financial system is in a range of stability when it dissipates financial
imbalances that arise endogenously or as a result of significant adverse and unforeseen events.
In stability, the system will absorb the shocks primarily via self-corrective mechanisms,
preventing adverse events from having a disruptive effect on the real economy or on other
financial systems. Financial stability is paramount for economic growth, as most transactions
in the real economy are made through the financial system’34.
Financial stability is an important feature of a well-functioning financial sector. The recent
rapid growth of financial sector should be accompanied by proper risk management and
regulation in order to refrain from systemic risks which can be a serious threat for global
financial stability. In this regard, the system has created various mechanisms to measure
systemic risk, stress tests, and other tools for financial stability. As the global financial markets
have been integrated over the recent decades, the importance of financial stability has been
increased since it is closely connected with macroeconomic stability, economic growth,
employment etc.
In this part of the study, bank regulatory capital to risk-weighted assets, bank capital to total
assets ratio and banks non-performing loans to total gross loans variables are used to measure
financial stability of financial institutions in the OIC Member States.
Bank regulatory capital to risk-weighted assets refers to the capital adequacy of deposit
takers. It is a ratio of total regulatory capital to its assets held, weighted according to risk of
those assets. This ratio is used as an important indicator to measure the robustness of the
financial institutions during financial shocks. International financial regulatory institutions, for
example the Bank for International Settlement (BIS), recommend financial institutions banks
to hold adequate amount of capital to protect from systemic risks.
As shown in the following figure, OIC-LIG and OIC-HIG have the highest scores over the
selected period compared to the other income groups and the World average. This can be
explained by the robustness and strong asset structure of the banking system for the OIC-HIG
group while the highest score for the OIC-LIG group may refer to weakness of asset base of the
banking system compared to the regulatory capital.
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