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(PDF) The Concept of Systemic Risk

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Added on  2021-01-02

(PDF) The Concept of Systemic Risk

   Added on 2021-01-02

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Systematic Risk
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Table of ContentsINTRODUCTION...........................................................................................................................1MAIN BODY...................................................................................................................................1TASK 1............................................................................................................................................1Briefly explain the project or system...........................................................................................1TASK 2............................................................................................................................................2Different view of scholars............................................................................................................2TASK 3............................................................................................................................................3Concept of Systemic Risk............................................................................................................3Global Financial Crisis (GFC) 2008............................................................................................4TASK 4............................................................................................................................................6CONCLUSTION.............................................................................................................................7REFERENCE...................................................................................................................................8
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INTRODUCTIONSystematic risk is one which is inbuilt in the entire market and is difficult to be preventedor unavoidable to a certain extent. It is also called undiversified or market risk. These affect thewhole market segment not specific industry or entity. It is not predictable and not possible toavoid, management have to develop different types of strategies which help the organisation toovercome from such possibilities of hazard. With the help of Risk Management companies try toreduce or minimise by use of various tools. Another type of it relates to Systemic which is anevent that triggers instability or collapse of entire industry or economy. It is the major contributorin the financial crisis of 2008 and most of the organisation consider it as 'too big fail'. In thecontext of given report, has been taken into consideration with its main focus on LehmanBrothers that led to Global Financial Crisis of 2008 and its effect on Australian Economy.Systemic risk not be confused with systematic risk because it will include the whole financialsystem. This report include the system, systemic risk, cascade risk where business have tomanage risk that occur in the organisation or affect the whole industry or economy. It include thecurrent trends in theory and it's application of risk management. In addition, it include the role ofleadership to mange project and associated with best practices. MAIN BODYTASK 1Briefly explain the project or systemIn the 2008 financial crises Lehman Brothers collapse became one of the biggest failureof history. Company provide huge amount loan to the people who are not able to take sub-primeloan because of their financial status. But Lehman Brothers provide huge number of mortgageloan to the public and after this number of defaulters will increase. At that point, company goingto bankrupt which affect the economy most (Acharya and et.al., 2017). Between 2004 to 2006,capital market increase by 56% because of Lehman's real estate business. It will cause to becomefastest growing investment banking and assets management business. Due to failure to complywith policies of government regarding credit facilities also led to the demise of Lehman Brothersas an investment Bank as well as the induction of Financial Crisis. It is reported that companyhave $19.3 billion revenue and $4.2 billion net income in 2007. 2008 financial crises is one ofthe worst economic disaster after 1929 Great depression period. Federal Reserve and Treasury1
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Department try to prevent this through various practices. It was started from 2006 when banksallow people to take out 100% loan value to their homes. Most of the people blame CommunityReinvestment Act where it will pushed banks to invest in sub-prime area. After this, it will takedrastic turn in the banking sector because of several issues such as defaulters on loan,unsustainable sub-prime mortgage and housing market began to crash. Because of the defaulters,Lehman Brother become bankrupt and it affect the economy at huge level. Stock price ofLehman drastically reduce and almost 77% investors doubt were grow and CEO of the companyhave to sell their assets management units (Bisias and et.al., 2012). After fallout from LehmanBrothers other factors also affected and it resulted, over 6 million jobs were lost and10%unemployment rose. After bankruptcy of Lehman Brothers it will become synonymous offinancial crisis 2008. TASK 2Different view of scholarsAccording to Acemoglu, Ozdaglar and Tahbaz-Salehi (2015), risk managementassociated with the market where individual or industries linked with various accidents. Itinclude the market risk where organisation try to overcome the risk by use of different strategies.Risk can be occur because of legal liability, financial uncertainty, management errors, accidentsin the workplace or because of the product they produce and natural disaster. To overcome thesecauses, individual as well as industry need to take necessary actions and manage the risk. As perDionne (2013), Risk management in banks become hot topic after 2008 financial crises. For theavoidance of risk, management need to develop sophisticated strategies which the banks to meettheir goals. That further helps in avoiding major crises by following various practices. AlsoBessis (2015) suggests that Risk Management can also be used as a measure to control theexposure of risk within organisations and in the economy as a whole to prevent collapse offinancial as well as other related systems. Risk management in the banking sector include theassets liability management, credit risk and market risk. By following best practices bankingsector can prevent crises because 2008 financial crises affect the whole world badly. So itimportant for the government to review banking policies on regular basis and make sure thatbanks follow the rules and ethical practices which help the economy to prevent financial crises. 2
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