Question

If the value of the financial sector is in terms of reducing the individual risk in the economy, how could you measure the value of the financial sector without using information on loan payments (broadly construed to include any interest payment necessary to measure an interest rate or any payment that looks like a return on an investment)? If we think of the amount of individual risk remaining after individuals buy portfolios is a measure of the ineffectiveness of the financial sector [or its imperfections], what do you think accounts for these imperfections?

Answer 1

Let us understand the question first in normal way, that how the financial risk in associated with an individuals in the economy of any country.

The Financial risks are those risks which are likely to be linked with all financial transitions used to do by an individual.

While calculating the individual risks, one always use to consider the financial risk to access the individual profitability either by investing in portfolios or by investing through any other means,

Loan payments are also been associated with the financial risk where the loan payment and its interest rate is directly connected with the regulatory authority rates such as Repo rate and Reverse Repo Rate.

Now we talk about the imperfections in the individuals risk in terms of financial sectors, such imperfections always happens when there is the mismatch in ALM (Assets – Liability Management) one should always think of basic rate due to which there can be change in the overall market rates in the financial sector. Imperfections always been affected due to inflation rate and the interest rate with impacts to repo rate and reverse repo rate. So if one mismanages the ALM in their books and portfolio they always comes to an end of imperfections.

So if we conclude then the imperfections in portfolio created with the ALM mismatch which is associated with the Credit risk and the Inflation rate which is linked with the market risk, and the others are like the rates which are attached with the Central bank.