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Why Do People See A Financial System As A Whole Very Important?

Author

Listed:
  • Dian Masyita

    (University of Padjadjaran)

Abstract

The action of one person will affect the others and then the action of one country will affect other countries. Financial crisis is like a contagious disease, which spreads everywhere. The failure in capturing systemic risk is the interconnected market events (’network externalities’) can produce self-reinforcing cycles then create the harmful situation. What happened in the banking regulation particularly Basel II? In reality, Basel II did not work completely in 2008. Since the implementation of risk management based on Basel II has been a prerequisite for a bank, it is supposed to make a positive impact. Misplaced reliance on mathematical model and statistics in managing risk could one of the problems in the decision making process. Using system thinking, system dynamics paradigm and theory of feedback system, this paper tries to see the risk management from different perspective and to enrich the understanding of how financial systems work: what drives them and causes the behavior. Many lessons can be learnt from this financial contagion since Islamic banking and finance system has inevitably been a part of the international financial systems.

Suggested Citation

  • Dian Masyita, 2015. "Why Do People See A Financial System As A Whole Very Important?," Journal of Islamic Monetary Economics and Finance, Bank Indonesia, vol. 1(1), pages 79-106, August.
    • Handle: RePEc:idn:jimfjn:v:1:y:2015:i:1d:p:79-106
    DOI: https://doi.org/10.21098/jimf.v1i1.484
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    More about this item

    Keywords

    Financial Crisis; Interconnected Events; System Thinking; System Dynamics; Islamic Banking and Finance;
    All these keywords.

    JEL classification:

    • D10 - Microeconomics - - Household Behavior - - - General
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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