Defining Financial Stability

Financial stability has been the subject of many articles, speeches, conferences, and books, and yet its definition remains somewhat elusive. The term itself did not come into common usage much before 1996, when the Bank of England launched its Financial Stability Review, though Hyman Minsky was using the term by 1970. In his Per Jacobsson lecture (“Some New Directions for Financial Stability?”) Charles Goodhart admitted that “Indeed there is no good way to define, nor certainly to give a quantitative measurement of, financial stability.” Most people, when pressed, would probably define it as the absence of financial instability, or, less reflexively, as the lack of systemic financial crises or panics. Perhaps the key point here is systemic focus, in that the concern is not with the stability of a particular bank, firm, or household, but the financial system as a whole. A more positive definition employed by Michael Foot in a lecture—“What is financial stability and how do we get it?”—is confidence in the key financial markets and institutions.