Systemic Risk in Banking

Humanitarian and Economics Sciences, Vol. 50, Part 4, 2007

Annual Meeting of the University of Mining and Geology, St. Ivan, Rilski

5 Pages Posted: 4 Feb 2009

Date Written: October 18, 2007

Abstract

Bank failure is the result of a deficient risk management in banking leading the bank to a stage of bankruptcy, which means that the insolvent bank is going to be closed by the banking authority. In general, the banking sector is viewed as more vulnerable to contagion than other industries since banks are viewed as more susceptible to failures. The failure of a specific bank may trigger a chain reaction of bank failures and generate negative externalities for the whole banking system. Systemic risk means an externality whereby the failure of a single institution may lead to the failure of other institutions and to the breakdown of the entire system. Systemic risk is one of the main reasons why banks are regulated and supervised. In addition, systemic financial events may induce undesirable negative real effects, such as substantial reductions in output and employment.

Keywords: bank failure, systemic risk, chain reaction of bank failures

JEL Classification: G21

Suggested Citation

Driga, Imola, Systemic Risk in Banking (October 18, 2007). Humanitarian and Economics Sciences, Vol. 50, Part 4, 2007 , Annual Meeting of the University of Mining and Geology, St. Ivan, Rilski , Available at SSRN: https://ssrn.com/abstract=1337093

Imola Driga (Contact Author)

University of Petrosani ( email )

20, Str. Universitatii
Petrosani 332006
Romania