What is cascading failure?
Cascading failure is a where the failure of one part of an interconnected system results in the failure of more parts, and eventually the whole system. The concept is comparable to a set of falling dominoes.
Where have you heard about cascading failure?
The term 'cascading failure' is used for many types of systems, including computer networks, power transmission and even the human body. In finance, cascading failure is more commonly known as systemic risk.
What you need to know about cascading failure.
In finance, cascading failure is usually used to describe the risk of one failing institution causing other institutions, or counterparties, to fail too. This phenomenon eventually results in a whole-system failure as the remaining institutions can't compensate for the failed institutions.
The 2010 Flash Crash is an example of a cascading failure in finance. The 36-minute crash started when contracts in the equity market started to decline, leading to the crash of the entire market before it recovered.
Find out more about cascading failure.
Cascading failure is more commonly known as systemic risk in finance. Read our guide here.