systemic risk theory

Systemic risk refers to the potential for a disturbance in one part of a financial system, such as a major bank or market, to trigger widespread instability affecting the entire economy. It arises when interconnections and dependencies among financial institutions amplify shocks, making the system vulnerable to cascading failures. This risk isn't just about individual entities failing but about how the collapse of one can cause others to fail, leading to a broader financial crisis. Managing systemic risk involves monitoring these linkages, implementing safeguards, and ensuring resilience across the financial network to prevent or mitigate such widespread disruptions.