Concerns have recently been raised that the efficiency and stability of major domestic and offshore financial markets could be undermined by large holdings of bad loans, weak capital positions, and low earnings by major financial institutions, particularly commercial banks. In some countries, concerns also have been expressed that firms and households may have become more vulnerable to cyclical downturns as a result of excessive debt accumulation. Furthermore, it has been argued that the financial fragility of these sectors could inhibit the formulation of monetary and fiscal policies, because of the fear that a tight policy might provoke widespread bankruptcies. This note briefly examines some of the factors that have contributed to financial fragility in the industrial countries, the potential effects of such fragility on credit availability, and the limitations that financial fragility could impose on the formulation of macroeconomic policies.
