Systemic risk may arise due to

Solution

Systemic risk refers to  the risk of a breakdown of an entire system rather than simply the failure of individual parts . In a financial context, it denotes the risk of a cascading failure in the financial sector, caused by linkages within the financial system, resulting in a severe economic downturn. As such, systemic risk can arise due to contagion effect i.e. the risk that financial difficulties at one or more bank(s) spill over to a large number of other banks or the financial system as a whole .