Systemic Risk

ystemic risk is the risk that a localized problem in the financial markets could cause a chain of events which ultimately cripple the markets. For example, a default by a major market participant might cause liquidity problems for a number of that institution's counterparties. This might cause those counterparties to fail to make payment on their own obligations, and a liquidity crisis could spread throughout the markets.

One of the purposes of financial regulation is to ensure that the markets operate in a manner that minimizes systemic risk.