Systemic risks

Published: 7/6/2024
Although there is no single, commonly accepted definition of systemic risk, in the context of financial stability it can be described as the risk of experiencing a strong systemic event that adversely affects a number of systemically important financial intermediaries, financial markets and related infrastructures.

The European Central Bank defines systemic risk as the risk that financial instability becomes so widespread that it impairs the functioning of a financial system and jeopardises economic growth and social welfare. The trigger of such an event could be an exogenous shock, whose source is outside the financial system (e.g. pandemic, war...) or could be related to the economy (e.g. build-up of excessive macroeconomic imbalances) or the financial system (e.g. a sudden disruption in international capital flows), in which case these are endogenous sources of systemic risk.

When compared with the other segments of the economy, the financial system is particularly vulnerable to the effect of systemic risk due to the specific structure of banks’ balance sheets in which short-term liabilities and placements with longer-term maturity prevail. The risks of maturity transformation are thus created due to the complex interconnectedness of financial institutions (e.g. through interbank market exposures, through payment systems or investments in the same instruments), which enables a rapid spread of shocks throughout the system and because expectations and confidence of participants in financial markets strongly impact the value of financial instruments. Therefore, in the analysis of systemic risks to the financial system it is not sufficient to analyse only the risks that may arise at the level of an individual institution, but also the potential of their spreading to other institutions, parts of the financial market or the entire economy. This very complex task not only requires the analysis of the entire financial system but of the entire economy and not only at the national level, but also the interconnectedness with other countries and markets and general global trends.