Systemic Risk

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Definition of 'Systemic Risk'

Systemic risk is the risk of collapse of an entire financial system or economy, as opposed to the risk of failure of a single institution. Systemic risk can be caused by a variety of factors, including:

* Financial contagion: When the failure of one financial institution causes other institutions to fail, either because they are directly exposed to the failed institution or because they lose confidence in the financial system as a whole.
* Asset bubbles: When asset prices rise to unsustainable levels, they can eventually collapse, causing losses for investors and financial institutions.
* Market illiquidity: When markets become illiquid, it can be difficult for investors to sell their assets, which can lead to losses and financial instability.
* Systemic risk can have a number of negative consequences, including:

* Financial crises: Systemic risk can lead to financial crises, which can cause widespread economic disruption and job losses.
* Loss of confidence: Systemic risk can lead to a loss of confidence in the financial system, which can make it difficult for businesses and individuals to borrow money and invest.
* Government bailouts: Systemic risk can lead to government bailouts of financial institutions, which can cost taxpayers money and increase the government's debt.

There are a number of things that can be done to mitigate systemic risk, including:

* Financial regulation: Financial regulation can help to prevent financial crises by limiting the risk-taking of financial institutions and increasing transparency in the financial system.
* Macroprudential policy: Macroprudential policy can help to address systemic risk by taking steps to reduce financial imbalances, such as asset bubbles.
* International cooperation: International cooperation can help to address systemic risk by coordinating the efforts of different countries to regulate financial institutions and prevent financial crises.

Systemic risk is a serious threat to the financial system and the economy. It is important to take steps to mitigate systemic risk in order to prevent financial crises and protect the economy.

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