A system risk (and/or systemic risk) is a risk, which can impair the function or even a continuing of a whole system. System risk is a Gegenpart to the specific risks, by which only certain system part takers are affected, without endangering the system as a whole.

In the last years the term became a part of the jargon in the economics and the financial markets. He took over his meaning from the discussion of evolutiver behavior development in ecological systems and of them if necessary system-endangering effects (see biology).

System risks cannot be covered also by insurance or only very limited. Since system risks meet all market participants, it is difficult to find an other party for an insurance contract. It is e.g. difficult to find an insurance of personal property or life which war risks cover can. The Essenz of the striking system risk is thus the strong correlation of the losses of all parties.

A further topic in this connection is the strong potential in the long runness of the money economy in the extraordinary case of crisis. In extraordinary crises the function of the financial markets is endangered. If the financial market participants complete financial transactions, whose Handelsvolumen the available base values exceed by far (speculative trade with derivatives, Hedge of find), then can the loss of a large market participant also different participants into fall. So a domino effect can develop, which exposes the whole market to the system risk of a collapse. On the other hand the financial markets and the volume of the acted contracts serve for the security from ever larger risk volumes. Thus financial markets are not only potential sources of risk, but serve also the risk protection.

Missing diversification possibility

A system risk, which becomes striking, cannot be turned away, the damage must from the system part takers concerned be carried. However the basic conditions can be set in such a way in the context of the system organization that the stability of a system is increased regarding recognized dangers. For the financial markets this framework is set by the economic policy and the financial market supervisory authorities.

From the system risk to the systematic risk

Financial market participants do not have i.d.R such fundamental doubt. They do not assume medium-term the whole financial market will break down. Financial market participants (e.g. banks) undertake large efforts, in order to adapt specific risks of the own risk load-carrying capacity. They avoid lump risks and avail themselves of the technology of the diversification.

The capital investor can adjust specific land, currency and industry risks by skillful diversification of his plants. With optimal diversification a not diversifyable residual risk remains in accordance with the Portfoliotheorie. This is called systematic risk.

In an individual Portfolio one can minimize the risk by diversification on the level systemic risk. Transferred to the total market view this means: If the Portfolios of all financial market participants and the balances of all banks are optimal gehedged, nevertheless no protection from the system risks exists. If for example all goods prices purge in a strong, long lasting deflation phase, the collateral (e.g. real estate prices) cancels itself, with which the credits of the banks are covered. Comes to large credit losses, bank balance sheets turned out into inclination, the book money supply shrinks despite already deep interest. The whole money and credit system fall into a system crisis. Economic situation crises are a weakly minted form of system crises, from which the economy recovers however i.d.R after some months or years again. Economic situation crises in a country or an individual restaurant area are less serious thereby than parallel running crises in several restaurant economics. In the first case again the total damage can be kept small by diversification.

See also

• Ecology
• System theory
• Portfoliotheorie
• Capital ate Pricing Model

Articles in category "System risk"

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