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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

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