CHAPTER 1Introduction to Systemic Risk

The topic of systemic risk should be of critical importance to the numerous actors and stakeholders that make up the global financial ecosystem. This includes, among others, financial institutions such as banks, investment banks, and asset managers, financial regulators, policymakers, and central banks, as well as individual investors. It is also important to the general consumer, given that systemic events have the potential of spilling over from the financial system and impacting the real economy. Many historical systemic events have led to national or even global recessions, significant loss of employment, and a spike in both corporate and personal bankruptcies and taxpayer losses. Clearly, the most widely known and recent example of a systemic event was the Credit Crisis of 2007–2009, which involved, among other events, the collapse of the U.S. residential real estate and asset-backed securities markets, as well as the bankruptcy or bailout of many globally recognizable financial institutions, including Lehman Brothers, Bear Stearns, and American International Group (AIG), among others.

Given the high-profile failure or effective failure of these long-established financial firms, combined with the fact that financial crises have occurred with far greater frequency over the last several decades, some people may assume that systemic risk is only a recent phenomenon. However, it is important to understand that systemic events have been ...

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