What do “systemic risk” and “too big to fail” mean?
The American financial system is a complex web of institutions. A host of regulations tie many of these firms together so that as the market goes, so go many of the institutions in the market. “Systemic risk” is the potential that the fate of one institution in the market will impact all the others. The most common fear is that the failure of a major bank or investment firm will cause the failure of many other or all other financial institutions. “Too big to fail” is the language used to describe one of these institutions that is considered likely to cause chaos in the marketplace in the event of its collapse. Bank of America, Citigroup, A.I.G., and others were all considered to be “too big to fail” by the government, which is why a bailout was passed. The fear was that the failure of one of these institutions would put the whole system at risk. “Mark-to-market” accounting laws in 2008 required that firms report the value of what they owned based on the going rate in the marketplace fo
