The financial crises of 2008 unveiled the hazards of relying on risks as many players in the market displayed rather reckless behaviors. Kopp, Kaffenberger, and Wilson (2017) note that financial stability depends on reasonable actions of all stakeholders and the reduction of reliance on risks. The reliance on risks and banksâ inability to secure their positions (as well as manage assets properly) led to major disbalances and, as a result, to a global financial crisis, which influenced the world economy (Kopp et al., 2017). Although diverse regulations and improved regulatory measures have been introduced, there is still a high chance of certain violations and misinformation. Some companies may display irresponsible behavior, similar to the situation that occurred in 2007. Companies and financial institutions cannot rely on risks, especially in the period of major financial constraints.
The COVID pandemic and associated measures became a substantial shock to the market and global economy. Many countries still cannot recover from the negative economic impact. The USA has been affected significantly as well, and the financial sector of the country is also still vulnerable. In times of instability, it is preferable to rely on equity (Xu, Hu, & Das, 2019). This focus on assets rather than risks decreases the chances of losing funds, which is more important than potential short-term gains. Although reliance on risks may seem attractive in the short-term perspective, the situation in the market is still uncertain, so it is better to increase equity. Once the US economy recovers from the negative effects of the restrictive measures related to COVID (as well as the pandemic itself), companies may consider increasing their focus on risks rather than equity.
References
Kopp, E., Kaffenberger, L., & Wilson, C. (2017). Cyber risk, market failures, and financial stability. Washington, D.C.: International Monetary Fund.
Xu, T. T., Hu, K, & Das, U. S. (2019). Bank profitability and financial stability. Washington, D.C.: International Monetary Fund.