Systemic risk - Financial definition
Concise definition of the term systemic risk
Systemic risk in economics and finance refers to the potential for a breakdown in an entire financial system or market, as opposed to the failure of individual entities or components. It signifies the risk of a domino effect leading to widespread financial instability.
Comprehensive definition of the term systemic risk
Systemic risk is a critical concern for regulators and policymakers as it encompasses the threat that the collapse of a single institution, such as a bank or financial intermediary, can trigger a chain reaction, causing severe disruptions in the broader financial system. This type of risk is often exacerbated during periods of economic distress when interconnectedness and dependencies among financial institutions amplify the potential for contagion.
Practical examples of systemic risk include the 2008 financial crisis, where the failure of Lehman Brothers led to a near-collapse of the global financial system. Mitigating systemic risk involves implementing robust regulatory frameworks, stress testing, and maintaining adequate capital reserves. Systemic risk management is also a component of broader risk management strategies, including the management of foreign reserves, which serve as a buffer to stabilize economies during financial turbulence.