What is meant by "systemic risk"?

Systemic risk refers to the potential for the failure of one entity to trigger widespread disruption across an entire financial system or market. It arises from the interconnectedness of financial institutions and markets, where the distress of a single institution can lead to a chain reaction affecting many others. This risk is particularly significant during times of economic stress, where the failure of a large bank or critical financial institution can jeopardize the stability of the entire economic system.

In contrast to the notion of systemic risk, the other concepts refer to more isolated risk factors. Individual company risk pertains to issues that affect a specific firm, such as bankruptcy or mismanagement, rather than the broader financial landscape. Market volatility, while important, deals with fluctuations in asset prices and does not inherently suggest systemic failure. Operational mishaps relate to internal failures within a company, such as technological failures or human error, which do not have the expansive impact that systemic risk implies.