Do hedge funds increase systemic risk?
The term “systemic risk” is commonly used to describe the possibility of a series of correlated defaults among financial institutions–typically banks–that occurs over a short period of time, often caused by a single major event. A classic example is a banking panic in which large groups of depositors decide to withdraw their funds simultaneously, creating a run on bank assets that can ultimately lead to multiple bank failures. Banking panics were not uncommon in the United States during the nineteenth and early twentieth centuries, culminating with an average of 2,000 bank failures per year during the 1930-33 period (according to Mishkin 1997) and which in turn prompted the passing of the Glass-Steagall Act of 1933 and the establishment of the Federal Deposit…
