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date: 04 March 2021

Abstract and Keywords

The chapter provides a comprehensive analysis of systemic risk in banking, as the primary ingredient in understanding financial crises that cause severe negative effects for the real sector. First, the important analytical elements of systemic risk are integrated into a coherent working concept. Three sources of systemic risk are distinguished, taking into account interactions between banks and asset prices, as well as the role of liquidity: contagion effects, aggregate and the endogenous buildup and unraveling of widespread financial imbalances. Ex ante (preventive) and ex post (crisis management) public policy to contain systemic risk and financial crises (including macroprudential policy) are also discussed. Second, the existing theoretical and empirical literature about systemic risk is reviewed in light of the previously developed general concept and on the basis of the experience of thefinancial crisis that started in the summer of 2007.

Keywords: systemic risk, contagion, financial imbalances, public policy, liquidity, bubbles, fire sales

Philipp Hartmann

Philipp Hartmann is Head of the Financial Research Division at the European Central Bank, a Fellow of the Centre for Economic Policy Research, and the Vice-President of SUERF—the European Money and Finance Forum. He works in banking, financial stability, European capital markets, and international monetary affairs. His research is published in academic journals, including Review of Economics and Statistics, Journal of Money, Credit, and Banking, Economic Policy, Journal of International Money and Finance, and Journal of Banking & Finance, and several books. His policy work has been discussed in fora such as the ECOFIN Council, the ECB Governing Council, European Commission fora, and the Basel Committee on Banking Supervision and published in numerous reports.

Olivier de Bandt

Banque de France

José Luis Peydró

José Luis Peydró has been an economist at the European Central Bank since 2005. His specialization is financial intermediation and monetary policy. He holds a PhD in Finance from INSEAD, a Masters in Economics and Finance from CEMFI, and a BA in Economics from the University of Barcelona. He won the First Prize for the best Economics BA student in Spain in 1997.

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