contagion effect

The contagion effect refers to how financial or economic problems can spread from one part of the system to others, much like how a contagious disease spreads. For example, if a major bank faces trouble, it can cause fears and losses among investors and other banks, potentially leading to a broader financial crisis. This ripple effect happens because different entities are interconnected through investments, loans, and markets, so problems in one area can quickly influence the health of others, amplifying the risk of widespread instability.