The stability of the financial system and the potential for systemic events to alter its functioning have long been critical issues for central bankers and researchers. Developments such as securitization and greater tradability of financial instruments, the rise in industry consolidation, growing cross-border financial activity, terrorist threats, and a higher dependence on computer technologies underscore the importance of this research area. Recent events, however, such as the terrorist attacks of September 11, 2001, and the collapse of the hedge fund Long-Term Capital Management (LTCM), suggest that older models of systemic shocks in the financial system may no longer fully capture the possible channels of propagation and feedback arising from major disturbances. Nor can existing models account entirely for the increasing complexity of the financial system, the spectrum of financial and information flows, or the endogenous behavior of different agents in the system. Fresh thinking on systemic risk is therefore required.
