What does "systemic risk" refer to?

Systemic risk refers to the possibility that an event, such as a financial crisis, could trigger severe instability or collapse across an entire financial system or market. This type of risk is characterized by its potential to impact many institutions, sectors, and the economy as a whole, rather than being confined to a single company or market segment.

When systemic risks materialize, they can result in widespread financial distress, affecting the interconnections between various elements of the economy. For example, the 2008 financial crisis illustrated how the failure of key financial institutions can lead to a broader economic downturn, demonstrating that systemic risk encompasses challenges that could affect the entire financial landscape.

On the other hand, the other options pertain to more isolated issues. The risk associated with individual companies focuses on company-specific factors, while market segment risk is confined to specific areas within a market. Currency fluctuations represent risks linked to specific economic factors but do not imply a total failure of the financial system. Hence, systemic risk captures the broader, cascading effects that can arise across the entire financial environment.