Systematic Risk

Systematic Risk

Systematic Risk Jonathan Poland

Systemic risk is the risk that a problem in one part of the financial system will have broader impacts on the market as a whole. This type of risk is often referred to as “contagion” because it can spread from one financial institution or market to others, potentially leading to a financial crisis.

There are several factors that can contribute to systemic risk, including the interconnectedness of financial institutions, the complexity of financial products and markets, and the presence of leverage (borrowing) in the financial system. In some cases, systemic risk can be exacerbated by regulatory failures or the inability of policymakers to effectively address problems in the financial system.

To manage systemic risk, regulators and policymakers may take a number of steps, including strengthening capital and liquidity requirements for financial institutions, implementing macroprudential tools to address broad risks in the financial system, and establishing crisis management and resolution frameworks to address problems in specific financial institutions or markets.

In summary, systemic risk is the risk that a problem in one part of the financial system will have broader impacts on the market as a whole. It can be caused by a variety of factors, including the interconnectedness of financial institutions, the complexity of financial products and markets, and the presence of leverage in the financial system. Regulators and policymakers can take a number of steps to manage systemic risk, including strengthening capital and liquidity requirements, implementing macroprudential tools, and establishing crisis management and resolution frameworks.

Here are a few examples of systemic risk events throughout history:

  1. The global financial crisis of 2008: This crisis was triggered by the collapse of the U.S. housing market, which led to a wave of defaults on mortgage-backed securities. The crisis spread to other parts of the financial system, including banks and insurance companies, and eventually led to a global economic recession.
  2. The collapse of Long-Term Capital Management (LTCM) in 1998: LTCM was a hedge fund that made highly leveraged bets on the direction of interest rates. When Russia defaulted on its debt and triggered a market panic, LTCM’s bets went bad and the hedge fund was forced to sell its assets, leading to a wave of selling that spread to other markets.
  3. The Asian financial crisis of 1997: This crisis was triggered by a sudden outflow of capital from countries in the region, which led to a series of currency devaluations and financial collapses. The crisis spread to other parts of the world, including Russia and Latin America, and had significant global economic impacts.
  4. The Savings and Loan crisis of the 1980s: This crisis was triggered by the collapse of the U.S. savings and loan industry, which had made a large number of risky loans and investments. The crisis spread to other parts of the financial system, including banks and insurance companies, and had significant economic impacts.
  5. The Great Depression of the 1930s: This was a global economic crisis that was triggered by a series of financial collapses and economic downturns in the United States and Europe. The crisis spread to other parts of the world and had long-lasting economic impacts.
Learn More
Relationship marketing Jonathan Poland

Relationship marketing

Relationship marketing is a type of marketing that focuses on building long-term, mutually beneficial relationships with customers, rather than just…

Team Leadership Jonathan Poland

Team Leadership

Team leadership involves guiding and representing a team, using influence rather than authority. In many cases, a team leader is…

Test Marketing Jonathan Poland

Test Marketing

Test marketing involves testing different marketing strategies or variations on customers in order to gather data and evaluate their effectiveness.…

What is Design Risk? Jonathan Poland

What is Design Risk?

Design risk refers to the potential negative consequences that a business may face as a result of problems or issues…

Market Fit Jonathan Poland

Market Fit

Market fit refers to the extent to which a product or service meets the needs and preferences of a target…

What is Dumping? Jonathan Poland

What is Dumping?

Dumping refers to the act of selling a product or service in a foreign market at a lower price than…

Contingency Planning Jonathan Poland

Contingency Planning

Contingency planning is a risk management strategy that involves developing alternative plans or strategies in case the primary plan is…

Pricing Power Jonathan Poland

Pricing Power

Pricing power refers to a company’s ability to increase prices without significantly impacting demand for their products or services. This…

Boss Archetypes Jonathan Poland

Boss Archetypes

A boss is a person who manages and oversees the work of an organization, department, or team. The term “boss”…

resources

For building

better assets

Business ownership remains the best way to build wealth, whether that’s direct ownership of a private business or via publicly traded stocks. Here’s how I can help you…

PLEASE NOTE: I am not a registered investment adviser and do not provide financial advice. My work is primarily with business leaders, turning insights from the financial markets into models for growth, development, and better capital allocation.