At the heart of the idea of systemic risk is the view that the failure or malfunction of one institution, market, or instrument can have negative externalities for others1.

For example, a 2009 Federal Reserve Bank of New York paper wrote that the opaqueness of the CDS market means participants often do not know the true exposure of CDS sellers, which creates further uncertainty in a crisis. After Lehman Brothers failed in 2008, CDS sellers were feared to face large losses, but long and short positions offset one another and the net amount was far smaller.

Notes

  1. International Monetary Fund (IMF), Bank for International Settlements (BIS), and Financial Stability Board (FSB), "Guidance to Assess the Systemic Importance of Financial Institutions, Markets and Instruments: Initial Considerations" (2009). ↩