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IAI Actuarial Core Principles · Business Economics · Role, structure and stability of the financial system

In the context of financial stability, which description best fits 'systemic risk'?

Systemic risk is the danger that the failure or distress of one institution or market spreads through links between firms and markets, damaging the whole financial system and the real economy, rather than remaining a loss confined to a single firm.

  1. AThe risk that one firm's investments earn less than the market average
  2. BThe risk that the failure or distress of one institution or market spreads through linkages and disrupts the wider financial systemCorrect
  3. CThe risk that interest rates change by more than expected for a single borrower
  4. DThe risk that a company's shareholders reject its dividend proposal
  5. The risk that a government runs a fiscal deficit in a given year

Explanation

Systemic risk is about contagion and interconnection: distress in one part of the system is transmitted to others and can impair the whole system's functioning. The other options describe firm-specific, interest rate, governance or fiscal matters, which are not system-wide transmission.

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