The risk that distress at one institution or market spreads and threatens the financial system as a whole. It arises from interconnection and common exposures.
Where you will meet it
Systemic risk comes up in 7 learning outcome notes across the FRM syllabus.
A few of them:
Anatomy of the Great Financial Crisis of 2007-2009 FRM Part I · Foundations of risk management
“Systemic risk arose because forced selling hurt institutions that had never held subprime assets.”
Structured Credit Risk FRM Part II · Credit risk measurement and management
“Senior tranches in particular have systemic risk, paying in full except in extreme states of the world.”
Advances in Artificial Intelligence: Implications for Capital Markets Activities FRM Part II · Current issues in financial markets
“For the exam, match each scenario to its channel, and note that provider concentration is an operational and systemic risk, not a market-risk one.”
Correlation Basics: Definitions, Applications, and Terminology FRM Part II · Market risk measurement and management
“Systemic risk is the risk that distress at one institution or market spreads and brings down much of the financial system.”
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