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What does ‘systemic risk’ mean?

Systemic risk is a factor of risk within a system that has the potential to bring down the entire system. In financial terms it is used to imply that there is an inherent risk in a system that if unchecked could stop the entire functionality of that system.

In the financial crisis that shook the world in 2008, the crash stemmed from a series of failures that harboured systemic risk. The failure of banking organisations such as Northern Rock and Lehman Brothers implied systemic risk because it affected the entire global economy. That measure of risk compelled governments to act, intervening in the economy; namely to save banks that were considered ‘too big to fail’ such as RBS with bailouts funded by the taxpayer.

Northern Rock presented a systemic risk to the UK economy

Northern Rock presented a systemic risk to the UK economy

Systemic risk is different to systematic risk which is the inherent vulnerability of the entire system to volatility, or ‘market risk’. Systemic risk is an individual risk to which the system is exposed: i.e. were RBS to fail it would pose a systemic risk to the financial system.