For four straight years the global financial system has shown impressive resilience. During the past six months in particular, markets have not been easy to intimidate. Global imbalances have widened, oil prices have risen strongly, hurricanes have struck, and turmoil has developed in U.S. credit derivative markets. Political uncertainty has increased in some emerging economies.

Yet, the global financial system has done well. Clearly the risk of financial crisis is always present, and optimism must be tempered with realism. But there are several objective factors that have given rise to the greater resilience of financial markets.

Solid economic growth, combined with low inflation, low bond yields, and cheap credits, have bolstered current financial stability. These are all essential factors that customarily sustain international financial markets and have done so through this cycle.

Risk has clearly not disappeared from international financial markets. Global imbalances, sustained high oil prices, and high levels of household indebtedness, could—each alone, or in combination—impair global growth in the future. On balance, these risks could certainly pose challenges. However, they are unlikely to materialize any time soon.

There are a number of reasons why we should be optimistic about continued international financial stability. First, capital inflows into the United States—most of them private—continue to finance the U.S. current account, and to support the U.S. dollar. These flows carry on unabated because of the country's favorable growth and interest rates, as well as its deep and liquid capital markets. They are unlikely to change direction abruptly since no other country or region enjoys the combination of robust growth and deep financial markets that the U.S. offers.

Second, through countervailing forces, financial markets have a way of self-correcting. Institutional investors are unlikely to sit on the fence for long and will become less risk-averse. They cannot afford to stay in risk-free but low-yielding cash positions, and need to remain fully invested by searching for "undervalued" assets.

There are additional market forces that make panic and contagion less likely. One is the growing importance of strategic institutional investors, like pension funds and life insurance companies, who take the long view, and are less likely to succumb to herd behavior. Another, is the increasing sophistication of institutional investors, who are able to differentiate between country- or company-specific versus systemic concerns. All in all, their diversity has increased over the years and so has their investment behavior. We should welcome this contribution to financial stability.

All those factors that have strengthened the financial system over the past few years now provide a welcome cushion if the global financial system were to come under stress. They would allow market participants and policy makers time to adjust and, therefore, to avoid full-blown crises. The much-strengthened balance sheets of the financial, corporate and household sectors can serve as one such shock absorber for financial systems against severe market corrections. The wide dispersal of financial risk from the banking to nonbanking sectors, improved risk management, and the enhanced transparency and disclosure in financial markets also work in the same direction.

As for emerging markets, fundamentals have strengthened as many countries have shown solid economic performance. They have also been building cushions against possible adverse developments, by accumulating reserves, undertaking early financing of external needs, and improving debt structures. Institutional investors like pension funds are increasingly making strategic allocations to emerging bond markets, and international investors are taking an interest in local currency bonds. This should help deepen national markets and reduce emerging market vulnerability to currency risk.

While all these factors are cause for optimism, they do not completely eliminate the potential for financial crises. To use a metaphor, were the world economy to suffer from a power outage, the financial system today could survive on the energy of back-up generators for a longer period than it would have a few years ago. Financial markets today are safer than they have been in a long time, but still, we cannot afford to be complacent.