The Life Cycle of Systemic Risk and Crises

Abstract

We present a life cycle view of systemic risk and crises that incorporates and synthesizes a number of views and organizes the theoretical and empirical research evidence in a clear fashion. We illustrate how systemic risks build during the boom, are realized during the following crisis, and are well addressed or not in the aftermath, which helps determine how well or poorly the following cycle will likely evolve. We aim to improve current understanding of systemic risk and crises, the roles of the different economic segments of society, highlight key issues of measurement, and provide guidance for future academic research and policy analysis. We address several controversies – the outsized role of the banking sector in creating and resolving systemic risks, its exclusive role in systemic risk measurement, and seemingly irrational behavior in which the same or similar costly mistakes are repeated every cycle.

Keywords: Banks, Systemic Risk, Financial Crises, Real Economy, Financial Markets, Bailouts, TARP, COVID-19

JEL Classification: G18, G21, G28