The possibility that the failure of one bank affects the performance of other banks is called:
A) moral hazard.
B) a liquidity crisis.
C) systemic risk.
D) credit risk.

Question

Quizplus · Accepted Answer

Systemic risk refers to the possibility of a financial crisis spreading across the entire financial system, as the failure of one institution leads to the failure of others. This can be caused by a variety of factors, such as interconnectedness between institutions, common exposures to a particular asset, or a lack of market liquidity. Moral hazard refers to the incentive for individuals or institutions to take on excessive risk because they know they will not bear the full cost of losses. A liquidity crisis occurs when there is a sudden shortage of cash or other highly liquid assets, which can lead to market disruptions and potentially cascade into a broader financial crisis. Credit risk refers specifically to the risk of default by a borrower or counterparty. While all of these factors can be related to systemic risk, C is the best answer because it specifically refers to the potential contagion effects of a financial crisis.

The Possibility That the Failure of One Bank Affects the Performance