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Systemic Risk

Systemic risk refers to the risk of a collapse in the entire financial system or a significant portion of it, typically triggered by the failure of a major financial institution, market contagion, or a severe economic event. Systemic risk threatens the stability of the financial system as a whole and can lead to widespread economic damage. Governments and regulatory bodies often implement measures to monitor and mitigate systemic risk to prevent financial crises.

Example

The collapse of Lehman Brothers in 2008 triggered a cascade of failures across global financial markets, exemplifying systemic risk that affected the entire financial system.

Key points

• The risk of collapse or instability in the entire financial system.

• Triggered by the failure of major institutions or market contagion.

• Can lead to widespread economic damage and financial crises.

Quick Answers to Curious Questions

Systemic risk is often triggered by the collapse of a major institution, market contagion, or severe economic downturns.

Regulators implement stress tests, capital requirements, and other measures to monitor financial institutions and reduce the potential for systemic failures.

Systemic risk affects the entire financial system and can lead to its collapse, while systematic risk refers to general market risk that impacts all investments.