Talk:Systemic risk

Intro error?
In the intro it states: "Systemic Risk" adds the important problem that it is much more difficult to evaluate than "systemic risk".

I think that should be more difficult to evaluate than "idiosyncratic risk" or "non-systemic risk"?

Jfrumar (talk) 03:47, 28 July 2008 (UTC)

Systemic Risk, AIG and Babble
In understanding 'systemic risk' and who knows enough to understand it, it is instructive to review the AIG situation.

Today, all agree that AIG collapse proposed a 'systemic risk', but during the AIG crisis, no one understood that, including all US Govt leaders, UNTIL they were taught that AIG proposed a 'systemic risk'.

The situation at AIG involved a liquidity crisis, and AIG had hired JP Morgan and Goldman Sachs to lead in finding a loan to allow AIG to bridge its liquidity crisis. And after several weeks of attempting to arrange a loan for AIG, JP Morgan and Goldman Sachs were unable to do so.

Then AIG, as reporpted widely in NYC newspapers, approached the US Federal Reserve asking for a 35-45 billion bridge loan.

Then, it was also widely reported in NYC newspapers, that Timothy Geitner, then president of the NY Federal Reserve, loudly announced he turned AIG down and would not loan AIG anything.

At that point, the White House, The US Treasury & Henry Paulson, and Ben Bernanke were all taught facts they did not know - that AIG had insured 100's of billions of Mortgages and also had insured trillions of derivatives, and that allowing AIG to collapse would cause widespread market disruptions leading to a global market collapse. (This input did not come from AIG and came from a private party.) —Preceding unsigned comment added by 69.121.221.97 (talk) 13:06, 11 April 2009 (UTC)

ONLY then, 1/2 day after receiving this info, only then, did the US Federal Reserve act to then quickly announce in that 1/2 day that AIG owuld be given a $85 billion loan.

SO, it is important to know and note that, neither JP Morgan, Goldman Sachs, or the US Treasury, including Henry Paulson, AND US Federal Reserve including Ben Bernanke knew that AIG collapse represented a "systemic risk" and only after having it explained to them did they act to loan AIG the $85 billion....

This key input is necessary to understand why all the discussion of 'systemic risk' is somewhat "babble" in that all the talkers do not know what 'systemic risk] is and that included Henry Paulson, Ben Bernanke and Timothy Geitner, present Secretary of US Treasury AS they were doing nothing to stop AIG collapse.

AND SO, having new legislation and / or new regulations discussing 'systemic risk' when the leading bank JP Morgan and leading Wall Street firm Goldman Sachs and leading US financial leaders as Timothy Geitner, Henry Paulson and Ben Bernanke DID NOT recognize at all that AIG was a 'systemic risk' until it was taught to them. is key in understanding why the duscussion is assumiung that there are people esp financial US government leaders who understand the term, when in fact history PROVES they did not at all....

EVEN though today, all three, Henry Paulson, Ben Bernanke and Timothy Geitner loudly point to AIG as a case where THEY saved the global capital markets from collapse and failure due to 'systemic risk' , when the REAL FACTS show they did not recognzie AIG failure as 'systemic risk' at all, and without intercession, they would have loaned AIG nothing at all as Timonty Gietner loudly proclaimed in NYC newspapers.

/s/ globil counsilor, mp 69.121.221.97 (talk) 06:03, 11 April 2009 (UTC)

Wrong definition
I disagree with the claim above. In 2007-08 central bankers have specifically justified their radical interventions in the market on the grounds that failures of some important institutions (e.g. Bear Stearns) threatened systemic risk. What they meant was that the failure of one institution could threaten the stability of the financial system as a whole (i.e. cause many other collapses). That's a very different meaning from saying that some large risk is undiversifiable (i.e. uninsurable). Risks that are too big to insure away (but which do not necessarily threaten the survival of the financial system) are sometimes called aggregate risks or perhaps sometimes systematic risks. If they are called 'systemic risks' that sounds like a misnomer to me, because 'systemic risk' is the usual term, to the best of my knowledge, for risks that threaten to propagate from one institution to another and bring down the system.

Therefore I would suggest completely rewriting this page to focus on risk of financial collapse. If people can find references to 'systemic' used as a synonym for 'aggregate', then it would be appropriate to mention both meanings. --Rinconsoleao (talk) 17:36, 21 July 2008 (UTC)

Note: the first reference on this page, entitled 'What is systematic risk?' defines it as 'risk of ... breakdowns in the entire system'. --Rinconsoleao (talk) 17:42, 21 July 2008 (UTC)

The third reference, on the other hand, uses 'systemic' as synonym for 'aggregate'. --Rinconsoleao (talk) 17:44, 21 July 2008 (UTC)

Systemic vs. Systematic
In my Finance textbook, it says systematic risk, not systemic, what's the difference? --70.111.218.254 00:25, 3 December 2006 (UTC)

Even finance professors do not seem to understand the difference: Systemic: of or related to a system; endemic. Systematic: using a system. The proper term is systemic.

I asked my Options and Derivatives Pricing professor if systemic and systematic are the same thing. Here's his response, which might be helpful to some:

The Wikipedia entry for systemic risk is also basically correct. It is clearly correct in saying that systemic and systematic risks are not the same. In fact, both terms are used in finance and mean two different things.

"Systemic risk" is commonly used in the credit risk/financial failure literature in finance. It basically means a catastrophic and complete failure of the financial system. This is what is described in the Wikipedia entry you cite.

This is not the type of risk for example in the CAPM. This is actually mentioned in the Wikipedia entry:

Systemic Risk should not be confused with market risk as the latter is specific to the item being bought or sold and the effects of market risk are isolated to the entities dealing in that specific item. This kind of risk can be mitigated by hedging an investment by entering into a mirror trade.

This is known as “market risk,” “non-diversifiable risk,” or “systematic risk.” This risk is the normal risk one faces in the economy because of macroeconomic events such as business cycles (expansions and recessions). It is possible to reduce the amount of this risk you hold.

Suppose for example an institution owns a large position in a complex credit swap. Rather than selling this swap, the common thing to do is simply to buy a position that offsets the cash flows of this credit swap. So, you will have one claim that perhaps right now owes you $5, but your other claim will pay you $5.

Under normal market conditions, this will net out perfectly and you will no longer be exposed to any market risk. We expect financial markets to work this way most of the time. In fact, the whole point of government regulations is to make sure markets do work in this fashion.

Now, suppose there is a systemic failure (note which word I am using) of the financial system. All counterparties that owe a lot of money now start dropping like flies – they don’t pay off any of their claims. Suppose one of these counterparties is the guy who owes you $5. What happens? Well, you thought you had eliminated all your market risk, but you didn’t expect the whole financial system to fail on you. That’s systemic risk and yes it hurts…

Now, is “systematic risk” (note the word I am using here again) OK to use as a synonym for market risk? Yes, in fact, this usage is well grounded and started with the statistics literature. People are not using the word incorrectly.

From the Oxford English dictionary, one definition of systematic is as follows:

d. systematic error, an error with a non-zero mean, so that its effect is not reduced when observations are averaged.

1925 R. A. FISHER Statistical Methods for Research Workers vi. 169 It is worth while to consider the effects of two classes of systematic errors, which, although of little or no importance when single values only are available, become of increasing importance as larger numbers of samples are averaged. 1981 Astrophysical Jrnl. CCXLVIII. 34/2 Although there is a statistically significant deviation from a Planck spectrum, there are serious limitations to the statistical analysis where systematic errors are likely.

In finance, the term “systematic risk” has been used as a synonym for “market risk” because “unsystematic” risk refers to an error with a zero mean. What this means is that if I add a bunch of “unsystematic” risks together, they cancel out. In the context of finance, they are “diversified” away. So, the basis of using “systematic” risk in finance to refer to “market” risk is all due to the statistical definition. It is not due to the more common definition of systematic:

a. gen. Arranged or conducted according to a system, plan, or organized method; involving or observing a system; (of a person) acting according to system, regular and methodical.

Summarizing, “systemic risk” is a complete failure of the financial system. “Systematic risk” is a synonym for “market risk” – the normal risk I am exposed to due to macroeconomic conditions (expansions, recessions, etc.). —Preceding unsigned comment added by Mg315 (talk • contribs) 21:02, 10 October 2008 (UTC)

Systemic vs. Non-Systemic
" Systemic risk should also be carefully distinguished from Non-systemic risk, which describes risks which the whole economy faces such as business cycles or wars."

Is this correct? My understanding is that Systemic/Systematic risk relates to events that affect every asset in a market. This would include wars and business cycles. Non-systemic/Unsystematic risk relates to events that affect a specific company. For instance, a large fire at a company's factory (which would obviously be catastrophic to that company, but not to every company in the market.)
 * The first reference cited helps here: "Systemic risk refers to the risk or probability of breakdowns in an entire system, as opposed to breakdowns in individual parts or components, and is evidenced by comovements (correlation) among most or all the parts." it says.


 * Wars can be beneficial to certain sectors (I am not propagating the "war economy" hypothesis here, but still, there are certain industries/entities which stand to gain from violent conflicts). Business cycles are very industry specific and while there is correlation among sectors it is not always overbearing. For example, the cycles in consumer electronics' sales will be independent of oil industry cycles outside of some minimal (read negligible) correlation.


 * Hence systemic risk is what is left after all the cycles and inter-industry correlations are factored. One might even go as far as saying that systemic risks can only be worsened, not mitigated. What we have at the moment, with imminent collapse of financial giants is market risk, credit risk etc. Systemic risks are those that are posed by the problems in the overall economy of USA and perhaps the world at large. Nshuks7 (talk) 10:47, 16 September 2008 (UTC)

Systemic vs Systematic
I was taught that the two terms are not synonymous, systematic referring to the market as a whole and systemic referring to a sector with sector-specific regulation (eg banking). In the global context, systemic could also apply to a single country and its regulatory structure

Market risk
Anyone could explain clearly what is the difference between Market risk and systemic risk? They seem to be exactly the same thing to me but two different articles exist... Why? --Bombastus 11:36, 2 October 2007 (UTC)
 * Systemic and Market risks are different in (1) source of risk (2) mitigation. Market risk (1) arises from any single investment and (2) can be mitigated using appropriate hedges. Both references on the Market Risk pages talk about mitigation of this risk. Systemic Risk (1) arises from the economy in general and (2) cannot be mitigated. Read http://web.mit.edu/alo/www/Papers/EcRev2007.pdf for more on how hedge funds increase systemic risk. I hope this answers your question. There might be other distinctions as well. Nshuks7 (talk) 10:36, 16 September 2008 (UTC)

Specific sources of systemic risk
Other than this, there have been a lot of discussions by the Fed and in other countries about systemic risks. These should be discussed in a new section. 203.197.5.8 (talk) 10:23, 19 September 2008 (UTC)
 * Algorithmic trading should be higlighted as a source of systemic risk.
 * Regulations should be elaborated as a source of systemic risk
 * How hedge funds lead to increase in systemic risk should be highlighted.

Systemic and systematic risk
As lots of comments above have noted, systemic risk and systematic risk are different concepts and need separate articles. I've created them, though systematic risk is pretty stubby. JQ (talk) 11:50, 26 November 2008 (UTC)

Definition?
Comment moved from article by - 2/0 (cont.) 17:15, 23 November 2009 (UTC)

Base on the vague definition of an entity it's hard to get an idea of systemic risk because it cannot be define as a number or count. Systemic risk has to be define by a quality not a quantity and so I ask the author to clarify by defining the quality that is define as systemic risk, otherwise trying to count the number or entities become impossible, hence a relative definition to a specific condition. A quality of systemic risk for example would be a black hole, a black body or a circle. Understanding those properties put you in a position to further elaborate on the topic and open further discussions from a significant point of reference. —Preceding unsigned comment added by 75.150.50.9 (talk • contribs) 2009-11-23T17:12:01

Opinion and Conjecture
The second paragraph in the "Explanation" section is not appropriate for this article. Whatever opinion the author might have had about how the financial crisis was handeled, it doesn't pertain the article on systemic risk.

"However, in practice, policy makers often appear to favor certain financial institutions at the expense of others." This statement and the paragraph that follows is opinion and unrelated to any explanation of systemic risk. Whether you think the government favored some banks or not, it does not add value to this article and merely presents an unecessary bias. Personally, I think this paragraph should be deleted. I disagree with the claims and I think the argument is superficial and over simplified. However, I would also be in favor of moving it to another article specifically dealing with the financial crisis or public opinion on the handeling of the crisis. —Preceding unsigned comment added by Adefeowiki (talk • contribs) 12:01, 5 November 2010 (UTC)

Adefeowiki (talk) 12:06, 5 November 2010 (UTC)

Zheng, Feng, Li (2012)
It seems this reference comes and goes from the article, not sure why? Zeyu Zheng, Boris Podobnik, Ling Feng and Baowen Li, "Changes in Cross-Correlations as an Indicator for Systemic Risk" (Scientific Reports 2: 888 (2012)).

On quick review its seems relevant to systemic risk, authored by academics, published in a ref journal, partially sponsored research by http://www.futurict.eu/.

The article is quite technical and quantitative. If its not relevant here there should be a legitimate reason why. Rick (talk) 19:28, 1 July 2013 (UTC)

You should check Boris Podobnik because he cannot be trustworthy source. He is completely politically biased, more agitator than scientist. — Preceding unsigned comment added by 188.252.199.189 (talk) 15:30, 27 September 2020 (UTC)

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Referencing in "Structural models under financial interconnectedness"
To someone who works in this area, the choice of references in this section seems odd as does the long discussion which authors knew or did not know about each others' works. For example, I am not sure that general readers will be interested in the question of when Elsinger came to know about Suzuki's paper. More importantly, the key structural interconnectedness papers, papers with thousands of citations, are never cited in this article, while papers with less than 50 cites are discussed in detail. I would like to edit to add citations for Cifuentes, Ferrucci, aand Shin (2005, JEEA), Glasserman and Young (JBF, 2015), and Acemoglu, Ozdaglar, and Tahbaz-Salehi (AER, 2015) and cut the discussion of who know about Suzuki's paper (but keep the reference to this paper). Any objections? Scholaris rerum obscurarum (talk) 14:30, 15 December 2019 (UTC)