Systemic Risk and the U.S. Financial System

Disturbances within a financial system can result in a cascade of other disturbances. The risk that disturbances in one component of a system will spread to others is called "systemic risk." To address systemic risk, some policymakers would prefer a more centralized regulatory authority. However, a closer look at how the financial system works suggests that this is misguided. The U.S. financial system is polycentric, closely tied to local economic activity, and ever-evolving. In today's world, systemic risk cannot be effectively regulated by a centralized regulatory authority.