Systemic Risk

Overview

Systemic risk arises through common exposures, leverage, liquidity dependence, correlated behavior, critical infrastructure, settlement links, and confidence effects. It can affect financial markets, payment networks, blockchains, stablecoins, custodians, or technology ecosystems.

Individual participants may appear resilient while their shared dependencies create collective fragility. Fire sales, margin calls, depegs, counterparty defaults, network congestion, or infrastructure outages can reinforce one another and overwhelm local controls.

Assessment should map concentrations, interconnected obligations, feedback loops, substitutability, recovery capacity, and transmission paths. Controls include buffers, exposure limits, diversified infrastructure, resolution plans, stress tests, transparent dependencies, and coordinated crisis procedures. Intervention plans should consider moral hazard, cross-border coordination, and unequal stakeholder impact.

Systemic risk is the possibility that failure or distress in one part of a connected system triggers widespread instability or loss. Systemic risk comes from connections and feedback loops, so system-wide resilience requires more than evaluating each participant separately.

For Systemic Risk, the assessment should evaluate the possibility that failure or distress in one part of a connected system triggers widespread instability or loss. The assessment record should separate observed evidence supporting the possibility that failure or distress in one part of a connected system triggers widespread instability or loss from assumptions, state the time horizon and existing controls, and identify who owns any remaining exposure. Monitoring should test whether the conditions described in the possibility that failure or distress in one part of a connected system triggers widespread instability or loss have changed enough to require a new rating, treatment, or approval.

Decision-makers should use findings about the possibility that failure or distress in one part of a connected system triggers widespread instability or loss to select treatment, assign remediation, set review thresholds, and document why any residual exposure is accepted.