Editing Systemic risk (section)

==Explanation==
Systemic risk has been associated with a [[bank run]] which has a cascading effect on other banks which are owed money by the first bank in trouble, causing a cascading failure.  As depositors sense the ripple effects of default, and [[liquidity]] concerns cascade through money markets, a panic can spread through a market, with a sudden [[flight to quality]], creating many sellers but few buyers for illiquid assets.  These interlinkages and the potential "clustering" of bank runs are the issues which policy makers consider when addressing the issue of protecting a system against systemic risk.<ref name="Kaufman" /><ref name="CRMPG3">[http://www.crmpolicygroup.org/docs/CRMPG-III.pdf Containing Systemic Risk], CRMPG III, August 6, 2008</ref> Governments and market monitoring institutions (such as the [[U.S. Securities and Exchange Commission]] (SEC), and [[central banks]]) often try to put policies and rules in place with the justification of safeguarding the interests of the market as a whole, claiming that the trading participants in financial markets are entangled in a web of dependencies arising from their interlinkage. In simple English, this means that some companies are viewed as too big and too interconnected to fail. Policy makers frequently claim that they are concerned about protecting the resiliency of the system, rather than any one individual in that system.<ref name="CRMPG3" /> Systemic risk arises because of the interaction of market participants, and therefore can be seen as a form of [[endogenous risk]].<ref>{{YouTube|UzW195qWHYg|What is systemic risk?}}</ref>

The risk management literature offers an alternative perspective to notions from economics and finance by distinguishing between the nature of systemic failure, its causes and effects, and the risk of its occurrence.<ref name= "Ilin">{{cite journal | doi = 10.1057/rm.2015.15 | volume=17 | title=The uncertainty of systemic risk | year=2015 | journal=Risk Management | pages=240–275 | last1 = Ilin | first1 = Thomas | last2 = Varga | first2 = Liz| issue=4 | s2cid=155209532 }}.</ref> It takes an "operational behaviour" approach to defining systemic risk of failure as: "A measure of the overall probability at a current time of the system entering an operational state of systemic failure by a specified time in the future, in which the supply of financial services no longer satisfies demand according to regulatory criteria, qualified by a measure of uncertainty about the system's future behaviour, in the absence of new mitigation efforts." This definition lends itself to practical risk mitigation applications, as demonstrated in recent research by a simulation of the collapse of the Icelandic financial system in circa 2008.

Systemic risk should not be confused with market or price risk as the latter is specific to the item being bought or sold and the effects of market risk are isolated to the entities dealing in that specific item. This kind of risk can be mitigated by hedging an investment by entering into a mirror trade.

Insurance is often easy to obtain against "systemic risks" because a party issuing that insurance can pocket the premiums, issue dividends to shareholders, enter insolvency proceedings if a catastrophic event ever takes place, and hide behind limited liability.  Such insurance, however, is not effective for the insured entity.

One argument that was used by financial institutions to obtain special advantages in bankruptcy for derivative contracts was a claim that the market is both critical and fragile.<ref name="Kaufman" /><ref name="CRMPG3" /><ref>[http://www.independent.org/pdf/tir/tir_07_3_scott.pdf What is Systemic Risk]</ref><ref>[http://mises.org/media/4014 The Economics of Legal Tender Laws], [[Jorg Guido Hulsmann]] (includes detailed commentary on systemic risk inherent in [[fractional reserve banking|FRB]])</ref>

Systemic risk can also be defined as the likelihood and degree of negative consequences to the larger body. With respect to federal [[financial regulation]], the systemic risk of a financial institution is the likelihood and the degree that the institution's activities will negatively affect the larger economy such that unusual and extreme federal intervention would be required to ameliorate the effects.<ref>[http://www.pciaa.net/web/sitehome.nsf/lcpublic/392/$file/PCI_Systemic_Risk_Definition.pdf Systemic Risk], Property Casualty Insurers Association of America</ref>

A general definition of systemic risk which is not limited by its mathematical approaches, model assumptions or focus on one institution, and which is also the first operationalizable definition of systemic risk encompassing the systemic character of financial, political, environmental, and many other risks, was put forth in 2010.<ref>Boran, M. (2010). Market Dynamics & Systemic Risk. ''23rd Australasian Finance and Banking Conference''. {{ssrn|1620495}}.</ref>

The [[Systemic Risk Centre]] at the [[London School of Economics]] is focused on the study of systemic risk. It finds that systemic risk is a form of endogenous risk, hence frustrating empirical measurements of systemic risk.