In finance book, you study the risk management. In risk management topic, you study different type of risks. One of them is systemic risk. Systemic risk means the risk of sink whole financial system due to weakness of a single unit of the system. We can compare it with human body system. Suppose, your human body is just like financial market. If one unit means, its brain shows weakness or collapses due to brain attack, what will be on the other parts of human body. Whole human body will be affected from this. Like this, after happening of systemic risk, who market will be affected from this. It means, there will be big loss in whole market. This risk is also called market risk.
Example of Systemic Risk
We can take the example of systemic risk which was happened in USA through Subprime Mortgage Crisis. More than 1/2 American Banks affected from this crisis. It started from 2007 and still in 2012 is happening. What was was happened in it. In 2000 to 2006, there was the trend of increasing price in the homes. People of USA were very happy. They started to take big loan for making new home because they knew that it was stable and profitable investment. On the other side, banks were also happy to give loan on the security of their homes. USA people had taken loan more than 127% of their income. Now, the time was come when they had to pay money, but they had no money. So, banks' pressure were on their home. They tried to sell their home but there was the recession in the real estate market. Prices of homes were declined. Suppose, Loan taken by home owner was $ 10 million. Actual value of home was just $ 5 million. It means about $ 5 million was the loss. Banks' reputation declined. Some banks became insolvent. Whole USA Economy affected from this crisis.
I say it systemic risk because System of giving loan is not good. Whole USA economy is based on loan. Everything, they want to do on debt. There is big need to improve this system.
Following way, we can get relief from systemic risk
1. Regulate the System
2. Hedging
3. Insurance of Systemic risk
4. Improvement and Updates in Project System
Example of Systemic Risk
We can take the example of systemic risk which was happened in USA through Subprime Mortgage Crisis. More than 1/2 American Banks affected from this crisis. It started from 2007 and still in 2012 is happening. What was was happened in it. In 2000 to 2006, there was the trend of increasing price in the homes. People of USA were very happy. They started to take big loan for making new home because they knew that it was stable and profitable investment. On the other side, banks were also happy to give loan on the security of their homes. USA people had taken loan more than 127% of their income. Now, the time was come when they had to pay money, but they had no money. So, banks' pressure were on their home. They tried to sell their home but there was the recession in the real estate market. Prices of homes were declined. Suppose, Loan taken by home owner was $ 10 million. Actual value of home was just $ 5 million. It means about $ 5 million was the loss. Banks' reputation declined. Some banks became insolvent. Whole USA Economy affected from this crisis.
I say it systemic risk because System of giving loan is not good. Whole USA economy is based on loan. Everything, they want to do on debt. There is big need to improve this system.
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| Subprime mortgage crisis diagram |
You know when you feel the risk of raining and storm what do you do? Your fear from heavy raining and storm will not live you happy. You will collect money day and night. You make home and save from this risk. Like this, financial experts have obtained the solutions of systemic risk.
Following way, we can get relief from systemic risk
1. Regulate the System
2. Hedging
3. Insurance of Systemic risk
4. Improvement and Updates in Project System
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