What Is Systemic Risk and How Should We Measure It?
Let’s accept, from the outset, that there are several plausible definitions of systemic risk, but any definition must capture the idea that a significant fraction of a financial market will be disrupted. Think about the classic banking panic, where depositors rush to convert their bank accounts into cash. In fact, scholars often emphasize the significant-fraction aspect by distinguishing between a run on a single bank and a panic, which involves many banks.3 Today, the significant-fraction idea means recognizing disruptions both inside and outside the banking system, including disturbances at nonbank financial institutions and within financial markets more broadly. A second concept that a systemic risk definition should embrace is that of contagion: Problems at one financial institution may spread to others, just as a fire might spread through a crowded tenement. The contagion may arise because one bank’s failure makes people nervous about the safety of other banks, or because financia
