SIFIs and the Financial Crisis

John Gerlach

This article was first published as a chapter in Managing Systemic Exposure, by Risk Books.

This chapter will provide an overview of systemic risk and the financial institutions that have become known as SIFIs (systemically important financial institutions). It will also highlight the major factors that led to the financial crisis of 2007–09 in the US and eventually in the European Union. The evolution of bank SIFIs and shadow banks will be described, as well as the role they played in the crisis, before we detail the myriad of financial derivative products that have been developed, their incredible growth in the space of a few years and the problems associated with the measurement of their risk. Finally, the role of the regulators and regulations in contributing to the crisis is examined, together with the regulations and guidelines developed to prevent a recurrence of the crisis.

Systemic risk is a form of financial risk concerned with the potential failure of the financial system of a country or the world. It was a problem when Russia defaulted on its sovereign bonds in 1998 and Argentina did the same in 2001; it became a major issue for the US government when the financial