SYSTEMIC RISK:An in-depth look

Abstract

Systemic risk now a major headache for financial economists results in a cascading effect of failure. The elusive nature of the risk makes it difficult to identify risk sources and thus counter the risk. However, many careful analyses by many scholars have left us with identification of some very plausible risk sources. Bank run, contagion, sovereign bond default are few of those sources to mention. Scholars have also devised some method so as to quantify risk exposures for an institution due to systemic risk. One such method is called “SRISK” which calculate capital shortfall- the amount of capital that would be required by a firm to withstand an economic downturn- for a particular firm. Besides SRISK CoVar, CoRisk, TBTF etc. are some other prevalent methods for assessing systemic risk. Tackling systemic risk might seem to be paradoxical as systemic risk can result from both endogenous and exogenous sources. However, to counter systemic risk in the banking sector BASEL in its BASEL III accord has stipulated few measures to be taken by banks to avoid systemic risk.