A Systemic Risk Indicator is a quantitative metric or analytical tool designed to quantify the potential for a failure within one financial institution or market segment to propagate and trigger a cascading disruption across the broader financial system.
Mechanism
Its construction involves aggregating and analyzing various market and institutional data points, such as interconnectedness between entities, leverage ratios, liquidity mismatches, and asset price correlations. These factors are processed through models to assess the overall fragility and potential for contagion.
Methodology
The theoretical underpinnings draw from network theory and contagion models, which help in mapping interdependencies and simulating stress scenarios. Regulators and financial institutions employ these indicators to monitor systemic vulnerabilities, inform macroprudential policy decisions, and enhance stability within both traditional and emerging digital asset markets.
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