Systemic risk is the risk that a problem at one financial institution, market or payment system spreads to others and disrupts the financial system as a whole, with serious consequences for the real economy: lost lending, failed payments, lost jobs and lower output. The concern is not the loss to one investor or one bank but a chain reaction in which many fail together. In 2009 the International Monetary Fund, the Bank for International Settlements and the Financial Stability Board described it as the risk of disruption to financial services caused by an impairment of all or parts of the financial system, with potentially serious negative consequences for the real economy.
Systemic risk is different from systematic risk, which is the market-wide part of an investment's risk that diversification cannot remove. Systemic risk is about the stability of the system itself. Since the 2008 financial crisis it has become the central concern of macroprudential regulation and of the authorities responsible for financial stability.
Systemic risk in plain terms
Think of a row of dominoes standing close together. Knocking over one domino is no great loss on its own. The danger is that it hits the next one, which hits the next, until the whole row is down. Some dominoes are so large, or stand at such a crucial point, that their fall is almost certain to bring down many others.
The financial system is a row of dominoes linked by loans, payments and shared investments. Banks owe each other money, rely on the same funding markets and often hold the same assets. Systemic risk is the chance of the whole row falling, and much of financial regulation is about spacing the dominoes out and making the biggest ones sturdier.
How distress spreads
- Direct exposures. When a firm fails, those it owes money to take losses, a form of counterparty risk. Dense webs of derivatives contracts, such as a credit default swap, can hide how exposed firms are to each other.
- Runs and funding freezes. Short-term funders, including depositors, money market funds and lenders in the repo market, may pull money at the first sign of trouble. A bank run can bring down even a solvent institution and turn into a wider liquidity crisis.
- Fire sales. Firms forced to sell assets quickly push prices down, which creates losses for everyone holding similar assets and triggers further forced selling, especially where leverage is high.
- Common exposures and confidence. Many institutions holding the same risky assets, such as the sub-prime mortgages of the mid-2000s, can fail together; and news of one failure can make investors suspicious of similar firms.
Episodes
The 1998 near-collapse of the hedge fund Long-Term Capital Management led the Federal Reserve Bank of New York to organize a private rescue by its creditors. In 2008 the failure of Lehman Brothers, a run on money market funds and the near-collapse of the insurer AIG froze funding markets worldwide; much of the trouble sat in shadow banking outside traditional bank rules. In March 2020 a scramble for cash disrupted even US Treasury markets. In September 2022, a sharp rise in UK gilt yields forced liability-driven investment funds used by pension funds to sell gilts, and the Bank of England intervened with temporary purchases. In March 2023 US authorities invoked the systemic risk exception to protect all depositors of Silicon Valley Bank and Signature Bank, and Swiss authorities arranged UBS's takeover of Credit Suisse.
Measuring and regulating systemic risk
Researchers have developed measures such as CoVaR, which estimates how the system's value at risk changes when one institution is in distress, and SRISK, which estimates how much capital a firm would need in a severe market decline. Authorities also run system-wide stress tests and map exposures between institutions.
- Global standards. The Basel III framework, set by the Basel Committee, raised bank capital and liquidity requirements and added a countercyclical capital buffer that can be raised in booms.
- Systemically important banks. The Financial Stability Board identifies global systemically important banks (G-SIBs), which must hold extra capital and plan for orderly failure. Its 2025 list, published in November 2025, named 29 banks.
- National bodies. The US Financial Stability Oversight Council was created by the Dodd-Frank Act in 2010; the European Systemic Risk Board was set up in 2010; and the Bank of England's Financial Policy Committee has statutory powers over UK financial stability.
- Infrastructure. Reforms pushed standardized derivatives into central counterparties, which reduces bilateral exposures but concentrates risk in a few clearing houses.
Debates and criticisms
Safety nets such as deposit insurance and central banks acting as lender of last resort calm panics, but critics argue they create moral hazard: firms seen as "too big to fail" can borrow more cheaply and take more risk. Some economists call for much higher capital requirements or for breaking up the largest banks; others argue that tighter bank rules simply push risk into less regulated corners of finance. Hyman Minsky's idea that stability itself breeds instability, captured in the term Minsky moment, remains influential in these debates.