Learn what systemic risk in banking means, how contagion spreads, and why regulators focus on capital, liquidity, and confidence.
Systemic risk in banking is the risk that distress at one bank or group of banks spreads through the financial system and disrupts lending, payments, funding, or public confidence more broadly. It is larger than an isolated credit problem at one institution.
Contagion can travel through interbank funding, payment networks, fire sales of similar assets, deposit runs, or a general loss of confidence in counterparties. Even banks that looked sound at first can become stressed if funding dries up, asset values gap lower, or customers begin to doubt the safety of deposits.
This matters because banking is built on maturity transformation and trust. Systemic risk therefore drives capital rules, liquidity regulation, lender-of-last-resort policy, stress testing, and resolution planning for large institutions.