Certified Financial Management Specialist Practice Exam

What does systemic risk reduction aim to achieve?

1. Maximize customer savings

2. Minimize risks affecting the entire financial system

3. Increase liquidity in the markets

4. Facilitate bank mergers

The correct answer is: Minimize risks affecting the entire financial system

Systemic risk reduction primarily aims to minimize risks that can impact the entire financial system. This type of risk refers to the possibility that the failure of one financial institution or the occurrence of a broader economic event could lead to widespread instability or collapse of the financial markets. By focusing on systemic risk reduction, regulators and financial institutions work to implement measures that enhance stability and resilience within the financial system as a whole, ensuring that shocks are contained rather than propagated. For instance, authorities may enforce regulations that limit excessive risk-taking by banks or establish safeguards to ensure that there are enough capital buffers in place during times of economic downturn. By addressing systemic risks, the overall health of the financial system can be maintained, protecting not just individual institutions but also the economy at large. Other options, while relevant to the financial industry, do not align directly with the primary goal of systemic risk reduction. Maximizing customer savings, increasing liquidity, and facilitating bank mergers might enhance financial performance or individual firms but do not specifically target the safeguarding of the entire financial system from systemic threats.