250 words please. Annuities Systemic risk evaluates the probability and extent o

Question

250 words please.

Annuities

Systemic risk evaluates the probability and extent of negative consequences to the larger body. For example, the government has a record of intervening in the event of a probable bank failure; the government’s larger concern is the negative impact on bank customers. Some call this a government bail-out.

Discuss the effect on stock market investor confidence should bank customers, individuals and businesses alike, lose access to savings and undergo a loss of future purchasing power due to a bank failure.

Explanation / Answer

Systematic risk is a non-diversified risk that affects all the companies / firms / organization in a particular economy. If a particular bank is getting failed then it is due to the emergence of non-systematic risk such as management risk, project risk or operational risk. Banks, stock markets and other forms of financial markets form a market place that work as medium of exchange of funds from the people having excess of funds to people having need of the funds. Most conservative form of the medium of exchange is Banks.

Failure of banks to give access to people towards their savings will make very adverse effects upon the financial system of the economy along with the stock market, consumer confidence as well as savings and investments.

People make savings and put that money in to stock markets, mutual funds and other financial products. Losing access to their savings will abrupt the functioning of stock market and their liquidity will be lost. Besides, shares will also not be traded frequently in the absence of funds. Consumer confidence will hit hard as banks are considered as a safe financial institution. If banks are falling then how can they believe on stock market?

FII flows to stock market will also be stopped and they will withdraw their money. It will make panic and stock market will crumble. Future purchasing power will also fall as demand of domestic currency will come down so their value. It will create a chaos in the economy.

It is primary reason that governments come up with bailout packages to rescue banks and rebuild consumer confidence.

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