Kerfisáhætta

Kerfisáhætta refers to the risk of collapse or severe disruption within an entire financial system, rather than just the failure of a single institution. This concept is crucial in understanding systemic risk. It arises when the interconnectedness of financial institutions and markets means that the failure of one entity can trigger a cascade of failures across the system. Factors contributing to kerfisáhætta include high leverage, complex financial instruments, and a lack of transparency. The interconnectedness can manifest through direct exposures, such as interbank lending, or indirect channels, like the contagion of fear and loss of confidence. Regulators pay close attention to kerfisáhætta because its realization can have devastating consequences for the real economy, leading to credit crunches, economic recessions, and widespread unemployment. Managing kerfisáhætta involves a combination of macroprudential policies aimed at limiting excessive risk-taking across the system and microprudential supervision of individual institutions. Stress tests, capital requirements, and resolution regimes are among the tools used to mitigate this type of risk. The 2008 global financial crisis is a prime example of how kerfisáhætta can manifest, demonstrating the profound impact of systemic failures.