National Bank of Denmark publishes analysis on how systemic risks build up and can be identified

The National Bank of Denmark has published an analysis setting out what systemic risks are, why they matter for financial stability, and how authorities can identify vulnerabilities and imbalances that could disrupt credit provision and amplify an economic downturn. The paper frames systemic risk as a system-wide phenomenon that can accumulate even when individual institutions appear robust. The analysis distinguishes systemic from institution-specific risks by emphasising collective behaviour and interactions that generate self-reinforcing and second-round effects, including herd behaviour, interconnectedness and fire sales. It describes cyclical systemic risks that build up in upswings and structural systemic risks linked to the economy’s and financial system’s structure, and illustrates the framework through examples relating to housing market dynamics, climate-related risks from both physical events and the green transition, and liquidity risks in non-bank financial institutions with potential spillovers to banks. It also surveys the main analytical toolkit for identifying systemic risks, from simple and composite indicators and financial-cycle measures to model-based assessments and stress testing, while noting that the purpose is conceptual and does not identify specific current systemic risks or propose mitigation measures.