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: Suggested Citation
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