systemic risk
The risk of collapse of an entire financial system or market, as opposed to individual failures, caused by interconnected institutions where one failure triggers cascading collapses.
Example
“The 2008 financial crisis illustrated systemic risk — failing mortgage securities threatened to bring down the entire global banking system.”
Memory Tip
SYSTEMIC risk = the whole SYSTEM at risk. One failure can cascade through everything.
Why It Matters
Systemic risk directly affects your personal finances because when major financial institutions fail, it can trigger widespread economic collapse that impacts your job, savings, investments, and access to credit. Understanding this risk helps you make better decisions about where to keep your money and how to protect your assets during financial crises.
Common Misconception
Many people believe that systemic risk only affects large investors and institutions, but in reality, everyday people suffer the most when financial systems collapse through job losses, frozen bank accounts, and destroyed savings. Individual bank failures are not the same as systemic risk, which is about the entire system breaking down rather than just one company going under.
In Practice
During the 2008 financial crisis, Lehman Brothers collapsed and triggered a systemic failure where major banks stopped lending to each other, credit markets froze, and hundreds of thousands of people lost their jobs and homes. The interconnected nature meant that when one major institution failed, it spread throughout the system like dominoes, ultimately requiring a 700 billion dollar government bailout to prevent complete economic collapse.
Etymology
SYSTEMIC (of the whole system) RISK. Risk to the entire SYSTEM, not just individual parts.
Common Misspellings
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Related Terms
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See Also
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