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Systemic risk - Definition and Overview |
| Related Words: Anthelmintic, Antibiotic, Antiseptic, Defoliant, Disinfectant, Fungicide, Germicide, Herbicide, Insecticide, Microbicide, Pesticide, Poison |
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A systemic risk is a risk faced by a system, in contrast to a specific risk or unique risk. In recent years it has become part of the jargon of economics and financial markets, taking its name from a combination of stystemic agents in biology and systematic risks elsewhere.
It is difficult to obtain financial protection against systemic risks, because of the inabaility of any counter-party to accept the risk. So it is difficult to obtain insurance for life or property in the event of nuclear war. Similarly, while the loan or investment risks associated with bankruptcy of a single firm can be reduced by diversification, it is difficult to protect against a general economic collapse.
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.
Diversification
Systematic risk is a risk of security that cannot be reduced through diversification. Also sometimes called market risk.
See also
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