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What Is Systemic Risk?

Authors

  • FRANKLIN ALLEN,

  • ELENA CARLETTI


  • Panel Discussion on “Policy Perspectives on the Regulation of Systemic Risk” at the Federal Reserve Board-Journal of Money Credit and Banking Conference on Regulation of Systemic Risk held September 15–16, 2011. This discussion builds on Allen and Carletti (2012).

Abstract

The traditional view of risk in a financial system is that it is the summation of individual risks within the system. However, the financial crisis that started in 2007 has driven home that this view of risk is inadequate. It is the interactions of financial institutions and markets that determine the systemic risks that drive financial crises. We identify four types of systemic risk. These are (i) panics—banking crises due to multiple equilibria; (ii) banking crises due to asset price falls; (iii) contagion; and (iv) foreign exchange mismatches in the banking system.

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