Original Research

Financial instability and banks’ balance sheets: A note

H. Abraham
South African Journal of Business Management | Vol 43, No 3 | a477 | DOI: https://doi.org/10.4102/sajbm.v43i3.477 | © 2018 H. Abraham | This work is licensed under CC Attribution 4.0
Submitted: 09 October 2018 | Published: 30 September 2012

About the author(s)

H. Abraham, School of Economics, University of Cape Town, South Africa

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Abstract

Following the recent financial crisis, it is sometimes argued that financial institutions should be regulated to a greater extent than before in order to prevent a recurrence of global financial crises. It is argued here that since banks create liquidity ex nihilo in exchange for financial collaterals whose nominal values are subject to market fluctuations, in general, banks’ regulation can have only a limited effect on the stability of the financial system. Monetary policy of central banks (i.e., setting short term interest rate) is essential to monitor asset prices and thereby create a stable financial environment.

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