Certified Financial Management Specialist Practice Exam

What is a systemic crisis in finance?

1. A minor financial issue in one bank

2. A widespread financial failure affecting the economy

3. A successful market intervention by the government

4. A sector-specific financial strategy

The correct answer is: A widespread financial failure affecting the economy

A systemic crisis in finance refers to a widespread financial failure that affects the entire economy rather than being confined to a single entity or sector. When such a crisis occurs, it typically involves failures in the financial system, such as a collapse of major financial institutions, a loss of confidence among investors, or a significant downturn in the credit markets. This widespread failure can lead to severe economic disruptions, increased unemployment, and a prolonged recession. In the context of finance, systemic risks are those that have the potential to cause cascading failures throughout the financial system, impacting various sectors, markets, and economies globally. Therefore, the recognition of a systemic crisis usually signals that the underlying problems extend beyond individual institutions to threaten the stability of the entire financial landscape. This contrasts with a minor financial issue limited to one bank, which does not have the capacity to disrupt the broader system significantly. Similarly, a successful market intervention by the government or a sector-specific financial strategy would not be identified as systemic crises since they imply targeted actions and localized effects rather than widespread failures affecting overall economic stability.