Systemic Risk Law and Legal Definition

Risk of collapse of entire financial system is systemic risk. Systemic risk affects entire class of assets or liabilities. The result is the decline of value of investment in a given period of time.

When systemic risk occurs in banking, it will affect depositors, also result in breach of obligation to other financial institutions. Payment problems at one financial institution will be transmitted to other institutions. The disaster works as a chain and other institutions come under financial pressure. The risk can even bring down an economy. It is a financial system instability caused by events or conditions in financial intermediaries. Measures adopted to protect against systemic risk are asset allocation and diversification. Diversification is a strategy to reduce risk by combining a variety of investments. Investments like stocks bonds and real estate are combined together to avoid risk.