Systemic Risk

Risk associated with the insufficient stability of a system due to interconnectedness and interdependencies that may result in cascading failures.

Background

Systemic risk refers to the potential for a disturbance or failure within a financial system or market that could trigger widespread instability due to intricate interconnections and dependencies among various entities. The significance of systemic risk lies in its ability to cause a domino effect, where the failure of one or a few entities results in subsequent failures across the system, leading to a possible collapse.

Historical Context

Definitions and Concepts

Systemic risk involves the insufficient stability of a system, with interconnected and interdependent entities. If one or more of these entities fail to function, it can lead to a chain reaction of failures throughout the system. This differs from systematic risk, which refers to market-wide risk factors affecting broad market segments and cannot be eliminated through diversification.

Major Analytical Frameworks

Classical Economics

Neoclassical Economics

Keynesian Economics

Marxian Economics

Institutional Economics

Behavioral Economics

Post-Keynesian Economics

Austrian Economics

Development Economics

Monetarism

Comparative Analysis

Case Studies

Suggested Books for Further Studies

  1. “Systemic Risk: Critical Infrastructures and Societal Systems” by Helbing, Dirk
  2. “Systemic Risk and Macroprudential Regulations: Global Financial Crisis and Its Aftermath” by Brunnermeier, Markus K., and Krishnamurthy, Arvind
  3. “The Financial Crisis and the Regulation of Finance” by Aebi, Vincent
  • Systematic Risk: Risk affecting entire markets or sectors and is inherently undiversifiable.
  • Moral Hazard: When one party takes risks knowing that they wouldn’t have to bear the full consequences of failure.
  • Too Big to Fail: The concept that certain financial institutions are so critical to the system that they shouldn’t be allowed to fail.
  • Contagion: The spread of market disruptions from one entity or market to another, causing widespread instability.
Wednesday, July 31, 2024