Current Risks to Financial System

Current Risks to financial System
Name
Institution/ Affiliation
Current risks to financial systems
Financial systems play an integral role in economic growth and development of a nation - by linking savings and investments. Usually, they support the creation of wealth by facilitating the active movement of resources from households to firms. A country financial system’ supports economic transactions, allocation of savings, provision of legal monetary framework, and advisory services (Narayan & Narayan, 2013). It comprises of financial markets and services, financial institutions, and financial instruments - all connected to function as one. Despite the importance of financial systems, these systems face myriad risks that led to potential losses and derailed economic growth. Many scholars have established operational, credit, market, systematic risks as the most substantial risks that financial system face.
In the past decade, financial systems have weathered many storms caused by credit risks. They involve the possibility of losing money when a borrower is unable to pay back a loan - leading to interruptions in cash flows and increased costs of collection. They include credit spread risks due to volatility between investments interest rates and risks free return rate; and risks of downgrade occurring due to a reduction in the risk rat...