What Is Systemic Risk Today ? *

  • Bandt O
  • Hartmann P
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This paper develops a broad concept of systemic risk, the basic economic concept for the understanding of financial crises. It is claimed that any such concept must integrate systemic events in banking and financial markets as well as in the related payment and settlement systems. At the heart of systemic risk are conta- gion effects, various forms of external effects. The concept also includes financial instabilities in response to aggregate shocks. The quantitative literature studying systemic risk is surveyed in the light of this concept. Rigorous theoretical models of contagion have only started to be developed, so that a sound theoretical basis of the notion of systemic risk is still lacking. Econometric tests of contagion effects seem to be mainly limited to the United States regarding banking markets, to international spill-over effects during the 1987 stock market crash and to contagious currency crises. Geographical coverage as well as coverage of finan- cial markets and their settlement systems appear to be very incomplete. Moreover, the literature surveyed reflects the general difficulty of developing tests that can make a clear distinction between rational revisions of depositor or investor ex- pectations (“information-based” contagion) and “pure” contagion. It is concluded that, given the importance of systemic risk for the understanding of financial crises and for policies to ensure the stability of financial systems, it would be desirable if additional research could fill the gaps identified.

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  • Oliver De Bandt

  • Philipp Hartmann

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