What is the Difference Between Systemic Risk and Systematic Risk?

Systemic risk and systematic risk are two different types of risks in finance. Here are the key differences between them:

• Systemic Risk: Systemic risk refers to the risk of collapse of an entire financial system or market, as opposed to the risk associated with any one individual entity, group, or component of a system. It can be caused by various factors, such as a banking crisis, economic instability, or the failure of a major financial institution. Systemic risk is harder to quantify and predict, as it involves exogenous shocks to the system.
• Systematic Risk: Systematic risk, also known as undiversifiable risk, volatility risk, or market risk, refers to the risk inherent to the entire market or market segment. It affects the overall market, not just a particular stock or industry. Systematic risk includes the constant financial risks that exist in a market and have the ability to impact everyone involved in the market. Factors contributing to systematic risk include economic, geopolitical, and financial factors, such as inflation, recessions, wars, changes in interest rates, fluctuations in currency exchange rates, and natural disasters.

In summary, systemic risk is the risk of collapse of an entire financial system or market, while systematic risk refers to the risks inherent in the entire market or market segment. Systematic risk can be mitigated through diversification, while systemic risk is harder to predict and manage.

Comparative Table: Systemic Risk vs Systematic Risk

Systemic risk and systematic risk are both threats to the financial markets and economy, but they differ in their causes and methods for managing them. Here is a table highlighting the key differences between the two:

While systemic risks can be mitigated by diversifying a portfolio, systematic risks are more challenging to account for and require a different approach to risk management.