Publication
Information Contagion and Systemic Risk
Systemic risk is a key concern for policy makers entrusted with safeguarding financial stability. It is defined as the risk of joint default of a substantial part of the financial system, resulting in large social costs. One major source of systemic risk is information contagion: when investors are sensitive to news about the health of the financial system, bad news about one financial institution can adversely spill over to other financial institutions. For instance, the insolvency of one money market mutual fund with a large exposure to Lehman Brothers spurred investor fears and led to a widespread run on all money market mutual funds in September 2008. In South Africa, the insolvency of African Bank spurred fears about the health of South African money market mutual funds and only decisive policy intervention prevented a widespread run akin to the one following the Lehman insolvency.
Oct 2017