How is "systemic risk" defined by the FDIC?

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The definition of "systemic risk" as provided by the FDIC focuses on the risk that affects the entire financial system rather than just a single institution or market. This concept encompasses the possibility that the failure of one entity could trigger a chain reaction of failures across the financial sector, leading to broader economic instability and crisis.

In this context, systemic risk speaks to vulnerabilities within the interconnected financial institutions and markets, where the collapse of one part can lead to significant repercussions throughout the system as a whole. The comprehensive impact on the financial landscape is what makes it distinct, as it is not simply limited to localized issues or singular bank failures.

The nature of systemic risk is fundamentally about understanding how interconnectedness and dependency among financial institutions can magnify disturbances, leading to widespread consequences that can incapacitate the financial system. Therefore, identifying and managing systemic risk is crucial for maintaining financial stability.

Other options describe risks that, while important, do not capture the broader implications of systemic risk, which specifically concerns the collective health and functionality of the entire financial system.

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