Financial system risk

By professor Stefaan Duchateau, KU Leuven, HU Brussel and UHasselt

The disastrous impact of a financial system crisis strikes a modern society deep in the core of its economic functioning. System risks radically undermine the foundations of the financial system, they throw State finances into disarray and ultimately unravel the social underpinnings of our society. Nevertheless, system risks can, on the one hand, be prevented by intervening early enough in the development phase, and even more so, on the other hand, by depriving this profound form of financial risk of its feeding ground by means of efficient measures aimed at the correlation within and the concentration of the banking sector.

Other financial risks, such as market, operational or credit risks can, it is true, have far-reaching consequences for a number of individual participants, but they only cause a cascade of losses and a domino effect for other participants in the financial and economic machinery when specific circumstances arise. If we are able to recognise these conditions in time, then it is possible to prevent the development of system risk or at least to reduce its effects to such proportions that - provided correct policy choices are made - these can be remedied in time and at an acceptable price.

Such measures are, however, not given sufficient consideration. The authorities unfortunately mainly limit themselves to populist measures that result in overly hasty regulations, so the issue of system risk is not thoroughly dealt with and is at best simply postponed.

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