Source: The Financial Executive - www.feib.be
The recent crisis has been considered as the result of a systemic risk in the financial markets. The European Central Bank (ECB) has been targeted by the de Larosière Report to set up a special entity to track this type of risk and this focus on systemic risk is not unique. Regulatory authorities in USA and Canada are also asking themselves who should track this systemic risk. But what is systemic risk? Look at the most well known textbook in finance and more specifically those about the management of financial institutions and you will find risks like: Liquidity risk, interest rate risk, market risk, credit risk, off-balance sheet risk, solvency risk, technological risk, operational risk, exchange risk, country risk and so on, but no systemic risk.
Some might say: “Yes, but what about systematic risk?” Systematic risk is not systemic risk. The systematic risk refers to the risk that a firm cannot diversify away by using portfolio techniques. One can find a full development of the concept of the systematic risk when studying the Capital Asset Pricing Model (CAPM).
Steven L. Schwarcz defines the systemic risk the following way: “A common factor in the various definitions of systemic risk is that a trigger event, such as an economic shock or institutional failure, causes a chain of bad economic consequences-sometimes referred to as a domino effect. These consequences could include (a chain of) financial institution and/or market failures.
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Published on 12/10/2010
