What does systemic risk refer to in financial contexts?

Systemic risk in financial contexts refers specifically to the risk of total financial system collapse. This type of risk arises when the failure of one financial institution or entity can trigger a chain reaction, potentially leading to widespread disruptions across the entire financial system. It emphasizes the interconnectedness of financial institutions, markets, and infrastructure, where problems in one part can cascade and impact others, destabilizing the whole system.

In contrast, individual business failure pertains to risks that affect only single entities rather than the entire system. Risk of fraud within a transaction deals with dishonest or illegal acts that occur within specific transactions and does not reflect systemic vulnerability. Likewise, while external economic factors can influence systemic risk, they do not define it; systemic risk is primarily about the overall stability of the entire financial system rather than external influences.