Systemic risk

What it means

The risk that the failure of one institution or market propagates through the system as a whole.

The exam angle

Interconnectedness and common exposures drive it. Each firm managing its own risk prudently does not make the system safe — it can synchronise behaviour and make it less so.

Where it appears in the syllabus

• Current Issues in Financial MarketsFRM Part II · exam weight 10% · This cycle's readings — AI in finance, climate risk, digital assets, bank stress.
• Foundations of Risk ManagementFRM Part I · exam weight 20% · Risk taxonomy, governance, CAPM, multifactor models, financial disasters.

Related terms

• Basel AccordsThe international framework for bank capital and liquidity regulation, issued by the Basel Committee on Banking…
• Economic capitalThe capital a firm judges it needs to absorb unexpected losses at a chosen confidence level, computed internally.
• Moral hazardThe incentive to take more risk once someone else bears the consequences.
• RAROCRisk-adjusted return divided by economic capital, used to compare business lines on a like-for-like basis and to price…
• Stress testingRevaluing a portfolio under severe but plausible scenarios, rather than under the distribution of ordinary days.
• Bank runA self-fulfilling withdrawal of funding from an institution, where the rational individual choice to withdraw first…