The Bottom-up Approach to Systemic Risk

Jorge A Chan-Lau

The complexity of the financial system, together with a still-evolving understanding regarding the transmission of risks between the financial and real sectors, makes identifying and measuring systemic risk a complex task. Challenges arise from the lack of an accepted theory of systemic risk to ground the empirical work, prompting the observation that systemic risk is akin to “a grab bag of scenarios that are supposed to rationalise intervention in financial markets” (Hansen, 2012).

Notwithstanding the lack of solid theoretical underpinnings, regulatory, supervisory and risk management needs have prompted a search for systemic risk measures, with more than 30 measures developed by late 2011 (as documented by Bisias et al, 2012). These measures attempt to capture different dimensions of systemic risk, but they can be trimmed down upon adoption of the G-20 operational definition of systemic risk, as discussed in Chapter 1. According to the G-20 definition, systemic risk is the “disruption to financial services that is caused by an impairment of all or parts of the financial system and has potential to have serious negative consequences for the real economy” (IMF, FSB and BIS

To continue reading...

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here: