Certified Financial Management Specialist Practice Exam

Which of the following statements is true regarding systemic risk?

1. It only affects individual banks

2. It is limited to corporate fraud

3. It can have a widespread impact on the financial system

4. It does not influence global markets

The correct answer is: It can have a widespread impact on the financial system

Systemic risk refers to the possibility that an event at the company level can lead to the collapse of an entire financial system or market. This type of risk can arise from various factors, such as economic downturns, financial crises, and the interconnectedness of financial institutions. The statement indicating that systemic risk can have a widespread impact on the financial system is accurate because systemic risk affects not just one institution, but potentially all institutions connected within the financial system. For instance, the collapse of a large bank can cause panic and lead to a loss of confidence in the financial system, possibly triggering failures across multiple sectors and institutions due to their interdependencies. The other statements each lack precision. The notion that systemic risk only affects individual banks ignores the broader implications that can arise when one institution fails. Limiting systemic risk to corporate fraud overlooks other significant causes such as economic downturns or market crashes. Finally, asserting that it does not influence global markets is incorrect, as systemic risks can easily transcend borders, impacting financial systems beyond individual countries. This interconnectedness is a hallmark of the global economy, highlighting how systemic risks can reverberate around the world.