There are various threats to the financial system that policy-makers and business executives should be aware of. This paper is aimed at discussing some of the most essential risks. First of all, one should speak about insider trading or the use of non-public information while purchasing or the stocks of a company.
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This activity can result in the situation when the executives of businesses or financial institutions can disregard the interests of investors and stockholders and put these people at a disadvantage. The members of the general public will not be able to make informed decisions about the performance of various stocks, and they will lose the trust in the financial trust. So, insider trading can destabilize the financial system.
In turn, Ponzi schemes can be described as the financial fraud when investors are compensated from the money of subsequent investors. This activity lead to the creation of economic bubbles such as dot-com bubbles. The existence of such market can cause panic in the market, and it can lead to the poor performance of financial system. Additionally, tax-evasion can adversely affect the financial system, because this crime can contribute to the budget deficits. In the long term, this activity can lead to the stagnation of the financial system.
Apart from that, lack of transparency can be associated with the financial instability because in such an environment investors may not be fully of aware of their risks (Bouvard, 2012).
This argument is particularly relevant when one speaks about the trading of credit default swaps in 2005 and 2007 when many investors were not informed about the potential risk. Significant risks can be associated with the securities market. In most cases, the challenges arise in those cases when securities are not backed up by any assets. This argument is particularly important when one speaks about debt securities.
Finally, one should speak about such a threat as manipulation of the market or the action that prompts investors to act in a certain way (Misra, 2012). Very often, manipulation creates a demand for certain types of stocks. For example, the Federal Reserve lowered the interest rate for its bonds, and as a result, many investors chose to purchase the stocks of fraudulent companies such as Enron that deliberately mislead the purchasers of their stock. This is one of the main pitfalls that should be avoided.
Furthermore, the so-called currency manipulation or intervention can also pose significant threats to the financial system. In some cases, the fiscal authorities can purchase the currency of the country, and it means that the exchange rate does not reflect the real purchasing power of the currency. This activity can mislead investors and businesses who conduct businesses or carry out financial transactions. This is one of the dangers that should not be overlooked by policy-makers and business executives.
Finally, it is important to speak about governmental action or intervention that can adversely affect the financial system because this policy is not usually favored by investors (Beteto, 2012). In particular, one can mention the decision of the Cypriot government to intervene into the activities of the banks. This decision prompted many investors to withdraw their capital from the country, and in the long-term, it can lead to the stagnation of the financial system and the decline of the economy.
Beteto, D. (2012). Government Intervention and Financial Fragility. Web.
Bouvard, M. (2012). Transparency in the financial system:rollover risk and crises. Web.
Misra, V. (2012). Evidence of market manipulation in the financial crisis. Web.