Systematic risk refers to the risks that affect the entire market or economic system, rather than just individual companies or industries. The root cause of this risk lies in factors such as the macro economy, politics, society, or the natural environment. It has a broad impact and is difficult to avoid through diversified investment. The outbreak of systematic risk is often difficult to predict, and when it does occur, the market usually fluctuates dramatically.
Sources of Systemic Risk
1.Internal Factors within the Financial System
Interconnectedness of financial institutions: The business interactions and asset-liability relationships between financial institutions are complex. The risks of one institution can quickly spread to the entire financial system through contagion effects.Leverage effect of financial markets: High leverage operations amplify returns but also amplify risks. Once the market reverses, it may trigger large-scale deleveraging and asset sell-offs. For example, when the Bank of Japan raises interest rates, Carry trade traders between Japan and the United States are forced to close their positions.Uncertainty of financial innovation: While financial innovation improves efficiency, it may also bring new risks. If supervision is not in place, it may lead to risk accumulation.Risks of shadow banking: The shadow banking system lacks supervision, and its scale and risks are difficult to accurately assess, which may become a hidden danger of systemic risk.
2.Macroeconomic Factors
Economic cycle fluctuations: Economic recession will lead to a decline in corporate profits, an increase in unemployment rate, and a decline in asset prices, thereby triggering financial market turmoil.
Asset bubble burst: The burst of asset price bubbles such as real estate and stocks may lead to a shrinking of investor wealth and an increase in bad debts of financial institutions, thereby triggering a financial crisis.
Inflation or deflation: Severe inflation or deflation will distort price signals, disrupt economic operation, and increase financial risks.
3.Other External Factors
Political events: Major political events such as wars, terrorist attacks, regime changes, or national policy adjustments may trigger market panic and uncertainty.
Natural disasters: Natural disasters such as earthquakes, floods, and hurricanes can cause large-scale economic losses and market turmoil.
Geopolitical risks: Geopolitical risks such as international tensions and trade frictions may affect global economic and financial stability.
Technological changes: Disruptive technological innovations may lead to the decline of certain industries, thereby affecting the market.
Public health events: Infectious disease outbreaks and other public health events may have a serious impact on economic activities and financial markets.
Black swan event: The 2008 global financial crisis, a global financial crisis triggered by the U.S. subprime mortgage crisis, had a severe impact on the global economy.
The sources of systemic risk are multifaceted, intertwined and interacting with each other, which increases the complexity of risk management. To prevent systemic risk, it is necessary to strengthen financial supervision, improve macro-control, enhance risk awareness, and establish a sound risk early warning and disposal mechanism.
