A Holistic Journey into Systemic Risk: Theoretical Background, Transmission Channels and Policy Implications

Systemic risk represents a critical challenge in modern financial systems characterized by complex interconnections. This chapter comprehensively analyses systemic risk, exploring its measurement, models, determinants, interconnections, and the key variables influencing its dynamics. One of the central focuses of this chapter is to explore the transmission channels through which systemic risk propagates. By analyzing various channels, including contagion risk, credit risk, liquidity risk, market risk, operational risk, and macroeconomic risk, the chapter unveils the mechanisms through which disruptions can spread across financial institutions, markets, and economies. The interconnected nature of these channels is also emphasized to showcase the amplification of systemic risk. The interconnections between financial institutions and markets are crucial factors of systemic risk. We discuss the significance of network analysis and emphasize the importance of considering both visible and hidden (shadow) interconnections when assessing systemic risk. By identifying the vulnerabilities and interdependencies within the financial system, policymakers could then develop targeted measures to mitigate systemic risks. The chapter highlights the need for proactive monitoring, enhanced risk management practices, and coordinated regulatory efforts across jurisdictions. These policy implications could then strengthen the financial system’s resilience and reduce the likelihood of systemic crises.