The Concept of Systemic Risk
Systemic Risk Centre Special Paper No 5, The London School of Economics and Political Science, August 2014
29 Pages Posted: 10 Aug 2014
Date Written: August 8, 2014
The aim of the study is to analyze the concept of systemic risk. The study reviews a multitude of systemic risk definitions in the literature. In addition, the paper identifies factors that contribute to the build-up of systemic risk (vulnerabilities), the spreading of contagion and provides a conceptual blueprint linking these phenomena. The author proposes to define systemic risk as the risk that a shock will result in such a significant materialization of (e.g. macrofinancial) imbalances that it will spread on the scale impairing the functioning of financial system and to the extent that it adversely affects the real economy (e.g. economic growth). The blueprint intends to break down and clearly categorize the processes of accumulation, materialization and spreading of systemic risk. This should in turn facilitate its identification and subsequent mitigation by assigning appropriate preventive macroprudential measures. As an example, the blueprint is used to analyze systemic risk stemming from FX lending in CEE countries.
Keywords: systemic risk, contagion, macroprudential policy, financial stability
JEL Classification: E50, E61, G21
Suggested Citation: Suggested Citation