It is a widely held belief that volatility in financial markets is synonymous with risk. However, in most cases, the main risk that investors must consider is the inherent instability of asset prices.
Since the beginning of the year, we have been experiencing increased instability in the markets. The BIS refers to it as “healthy volatility,” an indication of the future return to monetary normalization after many years under the influence of extreme expansionary monetary policy measures. The institution values limited instability at this time, which can prevent greater excesses and risks in the future.
Managing instability is always important for investors. However, the prudence expected from central banks in implementing the stimulus withdrawal strategy and sound economic fundamentals will continue to favor financial stability. Monetary normalization will correct potential distortions in the markets.
In such a scenario, banks remain essential. First, they ensure the transmission of monetary policy, which will remain expansionary for a long time. Banks will thus maintain the financing that economic agents require under the best possible conditions. On the other hand, risk management is fundamental to banking activity. They can offer their experience and professionalism in managing investors’ savings.
In the last decade of strong monetary expansion, vulnerabilities have accumulated, such as the financial markets themselves. During the same period, the role of banks has been strengthened through complex regulation and strict supervision. Their role remains essential to maintain economic optimism in the future.
