Systematic Risk in international Financial System

Systematic Risk in international Financial System

Systematic Risk of financial may be categorized into two classes

1.    Collapse of international bank

2.    Sharpe decline in the share prices of international bank

Impact of Systematic Risk

Financial institution is closely linked with the business, and therefore a systematic risk may result in collapse of number of companies. The bank is providing financing to number of companies or business, bank issuing letter of credits, bank are keeping the securities of companies. Therefore a systematic risk of financial system directly affects the business or industry.

Reduction of Systematic Risk

International Regulation has been introduced to reduce the systematic risk of international market.

1.    Minimum Capital Requirements

International must maintain minimum capital requirement against the credit risk. In simple term the bank must be able to absorb the bad debt losses. There must be sufficient funds available with bank to absorb such losses.

2.    Discouraging Aggressive Lending

International bank must not aggressively lend the money. It means that a bank should not lend too much lending with low capital. It means that banks should adopt a balance policy for lending.