Systemic risk is a category of risk that describes threats to a system, market or economic segment. Markets with interconnected institutions and interdependent operations, such as finance, are most susceptible to systemic risk. In such markets, a failure at one entity or a small group of entities could have a cascading effect that bankrupts or ruins the entire system.
Systemic risk was a major cause of the 2008 financial crisis and the resulting great recession in the United States. As a result, several federal compliance regulations were enacted to reduce the risk of systemic risk in the financial marketplace. For example, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed to regulate the financial industry, break up any companies that are "too big to fail" and eliminate the need for future taxpayer-funded bailouts.Content Continues Below