Systemic Risk

Systemic risk means the risk that problems in one part of the financial system spread and damage the broader system. In simple terms, systemic risk is the danger that one failure can trigger a wider crisis. Systemic risk is important because banks, markets, and financial institutions are connected. If one major institution or market fails, it can affect lending, confidence, and economic activity. For example, the failure of a large financial institution could create systemic risk if it causes panic across the banking system. Systemic risk is not the same as one company’s normal business risk. It matters because the problem can spread beyond the original source.