There is considerable controversy over the role of the financial sector in economic growth, with some economists dismissing its role. Robinson, for example, argued that the growth of the financial sector would depend on the health of the economy, while others, such as Miller, emphasized that the financial sector is a necessary element of economic growth. Others, however, argue that the financial sector does not directly cause economic growth, but can be a useful indicator.
Banks face numerous risks, including pandemics, and are subject to intense competition within the banking industry. This can limit their ability to perform in an uncertain environment. Pandemics, for example, can result in a reduction in loan returns and a rise in non-performing assets. As a result, banks may experience a major breakdown in their lending practices, causing a corresponding reduction in their profitability. In addition, the financial sector can be negatively affected by a host of other factors.
Global policy uncertainty affects the ability of banks to create liquidity. It may also affect the stock market. Uncertainty regarding economic policy will negatively affect investment and consumption, which in turn will affect the economy. It can also affect the stability of the financial sector in BRICS countries. In this context, financial sector indices play an important role. The indices provide a market-based measurement of the performance of financial sector services. These indices are critical for the allocation of resources, risk diversification, and dealing with information asymmetry.
A robust financial sector can enhance growth in an economy by facilitating efficient allocation of financial resources. The efficient functioning of the financial sector promotes investment in the real sector. It also reduces the asymmetry of information between investors and firms. Furthermore, the financial sector reduces information asymmetry by directing funds to entrepreneurs with better chances of creating a new production process. Moreover, the financial markets play a vital role in corporate governance.
Competition is good for individual banks and the banking system, but excessive competition can have negative consequences. Therefore, it is essential to identify the implications of excessive competition and to address these concerns. The study utilized descriptive, investigative, and exploratory research methods to capture the extent of competition in the banking industry in Nigeria. It also identifies implications in terms of supervision, risk management, market discipline, and self-regulation. While competition is desirable, it should not create a monopoly situation.
There are numerous risks to the financial system, including a failure of large banks. Regulatory forbearance, buffers, and loan restructuring are some of the steps that banks can take to minimize the risks associated with financial crises. These steps must be time-bound, transparent, and based on rigorous risk assessments. There is a risk of systemic risk in the financial sector and policymakers must work together to minimize it. In addition, a coordinated global effort is crucial to reducing the likelihood and severity of future crises.
During a financial crisis, a country may suffer a severe fall in currency value, as well as volatility in the financial markets. Moreover, the financial system may collapse, causing widespread economic damage and a loss of capital. A financial crisis occurs when several institutions cannot repay loans on time, resulting in a large increase in non-performing assets. This in turn reduces the overall capital of the banking system. Therefore, the impact of a financial crisis on the economy is overwhelmingly negative.