BTL 869 - Resilient Financial System

 

The Banking Tutor’s Lessons

BTL 869                                                                               12-02-2026

Resilient Financial System  

At a broader level, resilience is defined as the ability of a system, community or society exposed to hazards to resist, absorb, accommodate to and recover from the effects of a hazard in a timely and efficient manner, including through the preservation and restoration of its essential basic structures and functions. 

In the context of financial system, a resilient financial system is one which is able to absorb the impact of endogenous shocks it is exposed to, rebound quickly to the original condition or adapt to new environment, and continue to perform its role of providing financial services. This definition of resilient financial system is different from a stable financial system. A stable financial system is one which is able to absorb shocks, whereas a resilient financial system will be able to adapt and reconfigure itself in response to a shock, in addition to absorbing the shocks. 

As such, our efforts should be focussed on building a financial system which is not just stable, but resilient, as the type, source, magnitude and frequency of shocks are turning out to be highly unpredictable and non-measurable to a significant degree. Accordingly, focus of regulation and supervision of financial system should be to make sure that financial system as well as individual financial institutions are not just able to absorb the shocks, but are able to adapt to the changed circumstances. 

The 3As of Resilience are: Anticipatory Capacity, Absorptive Capacity and Adaptive Capacity

Anticipatory Capacity could be thought of the ability of the financial system and its constituents to identify and measure emerging risks as early as possible and mitigate the risks by taking corrective actions. 

Absorptive Capacity is the ability to withstand the losses which may arise due to shocks which cannot be mitigated or avoided. 

Adaptive Capacity helps in adjust to the new realities, be it changed regulatory/economic conditions or a new competitive landscape. 

Sekhar Pariti

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