We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What is Global Financial Risk?

By Dana DeCecco
Updated: May 17, 2024
Views: 8,467
Share

The integration of world economies and financial systems is the result of increased trade. The free flow of ideas, goods, and services have led to the globalization of financial markets. The world's economies are becoming more interrelated through trade and international investments. Global financial risk is the potential for a systemic global collapse.

Systemic risk is the risk associated with the collapse of a financial system or the entire market. The global financial risk of total market collapse would most likely occur as a domino effect. Since global financial systems are interrelated, financial system instability could be created by the collapse of a single element within the system.

A chain reaction, or domino effect, may cause a similar collapse in a closely related market. Theoretically, this linked sequence of events could continue to the point of global financial collapse. The financial instability of inter-related markets may contain the catalyst needed to create a self-sustaining chain of events with catastrophic consequences.

It is impossible to determine the potential sequence of events brought about by the failure of a single industry. Sensitive dependence is a phenomenon common to chaos theory. The dependence of interrelated industries may be difficult to establish on a global scale.

The latest development in tracking global financial risk is through giant databases called global risk maps. The risk exposure of banks and large financial institutions are tracked in an attempt to monitor systemic risk. Tracking systemic risk is not preventing systemic risk. Mitigating global financial risk may be incredibly complex.

The Risk Response Network (RRN) has been developed to respond to complex interdependent risk. Corporations, governments, and regulatory authorities have supplied global decision makers to form a community of Risk Officers. These officers have at their disposal the most advanced risk analysis and risk management processes and tools. Proactive response is expected in times of financial crisis.

Technology and access to better and more complete information may be the answer to global financial risk mitigation. Transparency in the over-the-counter (OTC) sector may broaden access to information and result in electronic trading platforms connected to centralized counterparty clearinghouses. Access to technology might expose underlying problems in the financial markets.

Regulatory efforts are in effect to eliminate OTC markets and set up exchanges to replace them. Some believe that no amount of regulation can overcome the lack of technology or intentional manipulation. In order to replace OTC trading with exchange trading, markets may have to be restructured. Liquidity and volatility issues may be the unintended consequences of excessive regulation. Global financial risk mitigation is a work in progress.

Share
WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.

Editors' Picks

Discussion Comments
By riskanalyst — On May 11, 2011

An excellent example of interconnectedness and the need for financial risk analysis is the effect of Russian default on latin american markets simply because investors had to sell off south american holdings to cover losses on Russian assets. The only connection was common ownership.

Share
https://www.wisegeek.net/what-is-global-financial-risk.htm
Copy this link
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.