‘Systemic Risk’ and ‘SIFI’ and Global Economic Crisis

‘Systemic Risk’ and ‘SIFI’  and Global Economic Crisis Essay example
Masters
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Finance & Accounting
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Systemic risk is a peril that is widespread in a nation or the economy as a whole and cannot be avoided by coalescing the assets in well-diversified and large portfolios, and it is also called as non-diversifiable risk…

Introduction

However, between 1940s and 1980s, there were less bank runs in USA, mainly due to tight legal framework and due to the transformed atmosphere. However, the banking tighter regulation in U.S.A not proved to be satisfactory as more than 250 banks filed insolvency petitions between 1980s and 1990s. In 1990s, Asian countries witnessed an economic turmoil as a result many banks in those regions failed. The issue started with individual bank and slowly enveloped into the whole banking system of a nation and finally impacted the creditworthiness of such nation itself. Likewise, the subprime mortgage crisis occurred in the 2007 -2008 started with U.S financial institutions and U.S banks and finally impacted many financial institutions around the world. However, bank failures or bank runs are not occurring in all the nations. For instance, there is no bank failure at all in Ireland and in Switzerland. Rochet (2008) is of the view that interferences by politicians can play a significant role in bank runs.
Many frequent bank failures and bank runs urged the need to recognise and deter financial agonies in the future well before they commence. Hence, there is a necessity to establish a well-structured supervision system in the financial sector, and it should be given authority to identify “systemic risks.” Bini Smaghi (2009) is the first to emphasise the theoretical issues of systemic risk, and the agency established for the same is to be well versed in detection of risks, evaluation of risk, and finally giving warnings about risks. ...
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