Systemic Financial Risk

Systemic financial risk is the risk posed by the failure of financial institutions (e.g., commercial banks, investment banks, insurance companies, real estate companies) to the broader economy, whether on a national or on a global scale. In general, this risk increases when financial institutions are very large and/or very interconnected. And it increases further when these institutions begin to extend excessive amounts of credit to or begin to raise excessive amounts of capital for households, firms, and/or governments of dubious prospects, and/or when they begin to engage in excessive speculation about whether they will repay or generate specific rates of return. When financial institutions possess these qualities and engage in these activities, the failure of one can lead to the failure of others, which can ...