Financial crises pose systemic risks to the global economy from "summary" of Financial Markets and Institutions, Global Edition by Frederic S. Mishkin,Stanley G. Eakins
Financial crises have the potential to disrupt the functioning of the global economy, creating challenges that go beyond individual institutions or countries. These crises can spread rapidly across borders, affecting financial markets, institutions, and economies worldwide. One of the key features of a financial crisis is its systemic nature, meaning that it has the ability to impact a wide range of financial institutions and markets simultaneously. When one institution or market faces distress, it can trigger a chain reaction that spreads throughout the financial system. This interconnectedness can lead to a domino effect, where problems in one part of the system quickly spread to other areas. Systemic risks associated with financial crises can have far-reaching consequences for the global economy. These risks can undermine confidence in the financial system, leading to a loss of trust among investors and consumers. This lack of confidence can result in a credit crunch, where access to credit becomes limited, making it difficult for businesses and individuals to obtain financing. Moreover, financial crises can have significant macroeconomic effects, such as lower economic growth, higher unemployment, and increased government intervention. These effects can persist long after the initial crisis has passed, creating lasting challenges for policymakers and market participants. To mitigate the systemic risks posed by financial crises, policymakers and regulators must work together to strengthen the resilience of the financial system. This can involve implementing measures such as capital requirements, stress testing, and enhanced supervision to reduce the likelihood of crises and limit their impact when they occur. By taking proactive steps to address systemic risks, policymakers can help safeguard the stability of the global economy and protect against future crises.
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