Systemic risk describes the likelihood of the collapse of a financial system, such as a general stock market crash or a joint breakdown of the banking system. As such, it is a type of "aggregate risk" as opposed to "idiosyncratic risk", which is specific to individual stocks or banks. Systemic risk should also be carefully distinguished from systematic risk, which describes risks which the whole economy faces such as business cycles or wars. The Global Financial System refers to those financial institutions and regulations that act on the international level, as opposed to those that act on a national or regional level. ... Black Monday (1987) on the Dow Jones Industrial Average A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a market. ... For other uses, see Bank (disambiguation). ...

In banking, banks hold capital to absorb credit risk (e.g. bad loans), market risk (e.g. interest rate risk) and operational risk (e.g. exposure to lawsuits). In recent years development of international derivative markets led to tendencies of banks to sell their credit risk through "credit risk derivatives", a trend that has become popular under the heading of "securitization".

In insurance it is difficult to obtain financial protection against "systematic risks" because of the inability of any counter-party to accept the risk. For example it is difficult to obtain insurance for life or property in the event of nuclear war. The essence of systematic risk is therefore the correlation of losses. "Systemic Risk" adds the important problem, that it is much more difficult to evaluate than "systematic risk". For example, while econometric estimates and expectation proxies in business cycle research led to a considerable improvement in forecasting recessions, data on "Systemic Risk" is often hard to obtain, since interdependencies and counter party risk on financial markets play a crucial role. If one bank goes bankrupt and sells all its assets, the drop in asset prices may induce liquidity problems of other banks, leading to a general banking panic. Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of catastrophic financial loss. ... Nuclear War is a card game designed by Douglas Malewicki, and originally published in 1966. ...

One concern is the potential fragility of some financial markets. If the participants are trading at levels far above their capital bases, then the failure of one participant to settle trades may deprive others of liquidity, and through a domino effect expose the whole market to systemic risk. Market liquidity is a business or economics term that refers to the ability to quickly buy or sell a particular item without causing a significant movement in the price. ... poop ...

Diversification

Risks can be reduced in four main ways: Avoidance, Reduction, Retention and Transfer.^[1] Systematic risk is a risk of security that cannot be reduced through diversification. Also sometimes called market risk or un-diversifiable risk. Participants in the market, like hedge funds, can themselves be the source of an increase in systemic risk^[2] and transfer of risk to them may, paradoxically, increase the exposure to systemic risk. To meet Wikipedias quality standards, this article may require cleanup. ... Security is a type of transferable interest representing financial value. ... Diversification in finance involves spreading investments around into many types of investments, including stocks, mutual funds, bonds, and cash. ... Market risk is the risk that the value of your investment will decrease due to moves in market factors. ... Generally, a hedge fund is a lightly regulated private investment fund often characterized by unconventional investment strategies and often making use of legal structures (sometimes offshore) to mitigate the effects of local regulation and tax regimes. ...

Regulation

One of the main reasons for regulation in the marketplace is to reduce systemic risk.

References

1. ^ Managing and spreading of risk
2. ^ Systemic risk and hedge funds

See also

• Modern portfolio theory
• Capital asset pricing model
• Risk modeling