Systemic Risk and the Refinancing Ratchet Effect Web Mit Form

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PROFESSOR: Let's now turn to the concept of systemic risk. It's usually a good idea to start with a definition. What do we mean by systemic risk? Several oversight bodies and academicians have come up with some definitions. All of them have two common components, which are highlighted. First, that risks arise for the financial system as a whole, meaning the risks affect multiple financial institutions or markets at the same time or are interrelated in some way. For instance, banks often lend their excess checking account deposits, those they can't use immediately, to other banks for short-term needs. If several banks suffered an unexpectedly high withdrawal of deposits and, as a result, could not return the money they had borrowed from other banks, this would constitute a systemic risk event in the interbank market. Such an event occurred in the fall of 2008. A second common component of systemic risk is that it has an impact on economic activity. Sometimes, economists refer to this im