Systemic Risk & Financial Crisis

Running head: SYSTEMIC RISK & FINANCIAL CRISIS

Systemic Risk & Financial Crisis

Boston University

Systemic Risk & Financial Crisis

Introduction

Systemic risk is a possibility that an event at a company level could trigger instability or entirely collapse an economy or industry. This was a major contributor to the financial crisis of 2008. Companies considered a systemic risk are called “too big to fail” (Investopedia, n.d.). An example of a company considered a systemic risk is AIG because they were deemed “too large to fail” during the financial crisis and were bailed out. AIG is a very large institution relative to their industry and make up a significant part of the economy. A company that is highly interconnected with others is also a source of systemic risk (Investopedia, n.d.). The financial crisis of 2008 was a devastating event for the United States and there’s still questions that need to be addressed. What happened during the financial crisis and what has been done to rectify the situation?

Background on financial crisis

The financial crisis of 2008 caused unprecedented losses within the financial market. Prompted by the collapse of the housing market, the financial crisis developed into a systemic event resulting in wide spread defaults within the economy and large drops in the market around the world. Although the spotlight was put on huge losses in the mortgage markets and the banking industry, few would disagree on the substantial role that AIG played in the crisis due to their involvement and losses from credit default swap business (Chen, et al, 2013). The financial crisis can be described as a systemic risk that began with the beginning of an unregulated subprime mortgage market in the US, which eventually damaged the market from credit default swaps, buckled markets for securitized implements across global financial systems and triggered a global liquidity crisis (Goldin & Vogel, 2010). In the...