An active debate is currently takiing place around the definition of both "systemic event" and "systemic risk" and their effects. Despite the considerable amount of literature on the topic, there is no shared consensus about its meaning, features and policy implications. It is of fundamental importance to define the concept of systemic risk, by exploring both its macro and micro foundations and, at the same time, by focusing on its repercussions and interlinkages with the concept of systemic event. By highlighting the complexity of this issue, Alan Greenspan (1994), as chair of the FED, underlined that "the very definition of systemic risk is somewhat unsettled". Following Kaufman’s contribution (2003), three broad strands of literature were investigated in the attempt of providing a clear definition of this concept.
The first strand examines the repercussions of systemic risk at a macro-level, i.e. the risk spreading mechanism not only in the domestic economy but also across the entire international banking, financial, or economic system, rather than across a few institutions (Bartholomew and al. 1995). Mishkin (1995) focused more on the investment repercussions of such an important event, saying that systemic risk is "the likelihood of a sudden, usually unexpected, event that disrupts information in financial markets, making them unable to effectively channel funds to those parties with the most productive investment opportunities". In this regard, Allen and Gale (1998) analysed the cause-effect process through which macro-shocks can spark contagion episodes and bank runs. In this framework, Bordo et al. (1998) defined systemic risk as a situation where "shocks to one part of the financial system lead to shocks elsewhere, in turn impinging on the stability of the real economy" (pp. 31). In their exhaustive literature, De Bandt and Hartmann (2002) offered a similar view of a systemic event, saying that it takes place when a shock affects "a considerable number of financial institutions or markets in a strong sense, thereby severely impairing the general well-functioning (of an important part) of the financial system. The well-functioning of the financial system relates to the effectiveness and efficiency with which savings are channelled into the real investments promising the highest returns" (p. 11). They further defined systemic risk as the risk of experiencing a systemic event. In 2003, Kaufman referred to systemic risk as the risk or probability of collapse of an entire financial system. De Nicolò and Kwast (2002), Kupiec and Nickerson (2004) and Dow (2000) defined systemic risk as a mechanism that, at the same time of the shock, affects the entire financial system. In particular, Dow (2000) analysed systemic risk in four different ways: the disruption of the payment system due to the default of one or more banks, the depression of banking asset's values, the general fear of losing savings (simultaneous withdrawals from banks) and the reduction of national incomes linked to macroeconomic changes. The micro foundations of systemic risk across shock-transmissions and spillover effects on the entire financial system have given rise to another strand of literature. The following contributions emphasized causation mechanisms requiring close and direct connections between several institutions and different markets. Kaufman (1995) underlined that systemic risk is the probability that cumulative losses originate from an event that, through a contagion effect, involves a chain of institutions belonging to a market. The Board of Governors of the FED (2007) in providing the definition of systemic risk analysed the solvency capacity of institutions involved in a "private large-dollar payments network were unable or unwilling to settle its net debt position. […] Serious repercussions could, as a result, spread to other participants in the private network, to other depository institutions not participating in the network, and to the nonfinancial economy generally". Kambhu et al. (2007) defined systemic risk as the situation when financial shocks "have the potential to lead to substantial, adverse effects on the real economy, e.g., a reduction in productive investment due to the reduction in credit provision or a destabilization of economic activity". This contribution has stressed the transmission of financial events to the real economy, which represents the key element distinguishing it from a purely financial event.
A second definition of systemic risk from a microeconomic point of view arises from the interaction of exposures of the institutions in crisis with other subjects (third parties) involved in their businesses. Although this strand of the literature focuses on the spillover from an initial exogenous external shock, it does not include a direct causation mechanism, as underlined in the previous definition, but it rather emphasises similarities in third-party risk exposures between the units involved (Kaufman 2003). In this second meaning, it is of crucial relevance to evaluate the nature of the key-exposures of the involved parties and to assess the potential losses stemming from the original shock. We can state that this is a phenomenon that can be described as a correlation without direct causation between the implicated agents. Following with the analysis of the agents involved in periods of financial difficulties, it is of fundamental importance to assess the risk-exposure from common-shock contagion. This contagion effect indiscriminately affects more or less the entire universe reflecting a general loss of confidence in all the units (solvent and insolvent) involved in the system. Referring not only to bankruptcy but also to the default of all market participants, the G-10 Report on Financial Consolidation (2001) defined systemic risk as: "[…] a risk that an event will trigger a loss of confidence in a substantial portion of the financial system that is serious enough to have adverse consequences for the real economy". Such definition is shared by the US Commodity Futures trading commission (2005) that described it as the risk that a market participant’s default involves the other participants due to the interlocking nature of financial markets. Kaufman (1996) referred to cumulative losses that occur starting from an event that ignites successive losses along a chain of financial institutions or markets. De Bandt and Hartmann (2000) looked at systemic risk as the experiencing of a systemic event. This involves a Y institution in second-round as a consequence of an initial shock that has impacted on the X institution even if the Y institution was fully solvent at the beginning. We find this feature also in Bartram, Brown, Hund (2005), where systemic risk affects the unexposed institutions not otherwise involved by a crisis, given its economic fundamentals. The domino effect is explicitly defined as the likelihood that a failure of one bank triggers a chain reaction causing other banks to fail through interbank loans (Sheldon et al, 2008).
Overall, we can conclude that despite the vast literature on systemic risk, a clear and shared view of this term has not emerged. Nevertheless, the attempt to provide a general and unambiguous definition of systemic risk, both at a macro and micro level, has highlighted three principal aspects that must be recognised:
1. It must impact on a "substantial portion" of the financial system.
2. It has to involve spillovers of risk from one institution to many others.
3. As a consequence of systemic risk, strong and adverse macroeconomic effects must be registered.

Editor: Claudio DICEMBRINO

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