The traditional view of risk in a financial system is that it is the summation of individual risks within the system.However, the financial crisis that started in 2007 has driven home that this viewof risk is inadequate. It is the interactions of financial institutions and markets that determine the systemic risks that drive financial crises. We identify four types of systemic risk. These are (i) panics—banking crises due to multiple equilibria; (ii) banking crises due to asset price falls; (iii) contagion; and (iv) foreign exchange mismatches in the banking system.
What is systemic risk?
Carletti, Elena
2013
Abstract
The traditional view of risk in a financial system is that it is the summation of individual risks within the system.However, the financial crisis that started in 2007 has driven home that this viewof risk is inadequate. It is the interactions of financial institutions and markets that determine the systemic risks that drive financial crises. We identify four types of systemic risk. These are (i) panics—banking crises due to multiple equilibria; (ii) banking crises due to asset price falls; (iii) contagion; and (iv) foreign exchange mismatches in the banking system.
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