Systemic Risk: A Review

Abstract

As the interlinking of financial markets continuously increases, regulators particularly in the banking industry are beginning to get alarmed about how systemic risk is affecting this sector. Systemic risk was seen as the main cause of the 2008 worldwide financial collapse. It thrives in an interbank market environment where the channels for shock transmission between banks are present and eventually cause banks to collapse. Consequently, many countries have developed mechanisms to measure and predict the levels of systemic risk so as to be able to mitigate it. However, being a new concept, many regulators and stakeholders have challenges and limitations in being able to tackle the problem both at a regulatory level and at an institutional level. Despite these challenges, it is widely acknowledged that Systemic Risk can cause serious harm to an economy and must be addressed at all levels.