Systemic Risk and the Financial System

Abstract

This chapter introduces a common working definition of systemic risk, along the lines of ‘a risk of disruption in the financial system with the potential to have serious negative consequences for the real economy’. It then explores how systemic risk is typically understood by a range of interested parties and how this understanding does not always align with the working definition given above. It also explains why regulators and policymakers typically believe that all types of financial intermediaries, markets and infrastructure may be potentially systemically important to some degree. Two ‘models’ for systemic risk are explored, – the ‘domino’ model and the ‘tsunami’ model, – as are some historical examples of systemic risk events and some overall perspectives on why the financial system might be susceptible to systemic risk.