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What is endogenous risk?

Endogenous risk

This refers to certain risk factors that are related to the internal workings of the overall financial system, and how all participants interact with each other. It comes from the ancient Greek words for 'growing' and 'within'.

Where have you heard about endogenous risk?

The term was first used by researchers at the London School of Economics (LSE). They were reacting to the concept of exogenous risk - the idea that all risk in the financial system comes from external events or natural/man-made disasters.

What you need to know about endogenous risk.

Many researchers believe that the way individuals and institutions within the global financial system interact with each other can cause dangers when combined and multiplied. This includes seemingly minor decisions taken by traders, regulators and banks, for example, as they chase their own objectives. Most of the time, these individual decisions will counteract one another and the system will remain broadly stable. However, occasionally, these decisions can cause others to follow suit on a large scale, causing a crisis or financial crash. This is known as systemic risk.

Find out more about endogenous risk.

Read our definition of systemic risk to find out more about this concept.

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