What does "systemic risk" describe in financial terms?

"Systemic risk" in financial terms refers to the potential for a collapse of the entire financial system or entire market, as opposed to risks that would only affect a particular company or industry. This type of risk arises from interconnections within financial markets, where disturbances in one part can lead to widespread failure across the system. For instance, the 2008 financial crisis is a prime example of systemic risk, where issues within the housing market triggered a global economic downturn.

The key characteristic of systemic risk is its broad impact; it is not limited to individual entities but affects the overall stability and functioning of the entire financial ecosystem. It encompasses a multitude of factors, including economic downturns, regulatory changes, and other macroeconomic conditions that can lead to widespread financial distress. Understanding this concept is crucial for risk managers and policymakers in order to create strategies that mitigate potential threats to the financial system as a whole.