Systemic Risk
What is systemic risk?
Systemic risk is the risk that the failure of one company or collection of companies could bring down the entire financial system or crash the market. Companies whose collapse could have this impact are called "systemically important" companies.Banks and other institutions are prominent among them.
Where have you heard about systemic risk?
Central banks such as the European Central Bank and the Bank of England carry out regular systemic risk assessments to determine the risk of a national or regional financial system collapsing.
What you need to know about systemic risk...
Systemic risk means the risk that an event at company level could result in the collapse of an entire financial system. This was a major cause of the 2008 financial crisis, which brought to the fore the problem of companies that had grown 'too big to fail'. These are companies that are so large that their collapse will result in national or even international financial collapse. National governments have taken a range of steps to intervene in the economy in the hope of preventing such an event.
Systemic risk should not be confused with systematic risk, which describes the danger that the entire financial system may collapse.
