Systemic risk

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Systemic Risk

Unlike risks that just affect a single entity without damaging the entire entity, systemic risk is stated to be a financial risk connected to the collapse of an entire financial organization. The fact that a single entity's backslide can result in the collapse of the entire system is caused by leaks in the system. This risk is connected to a bank run, in which the impacted bank may also threaten other banks that are its creditors. Depositors may learn of the default, which would cause a panic to spread throughout the market. A bank run is one of the issues under systemic risk that policymakers assess when formulating risk management policies. Exchange rate regime and management of political, economic crisis are some of the reforms undertaken by these companies to reduce the effect of the systemic crisis.

Systemic Crisis and Growth

On the other hand, a systemic crisis is said to promote growth, arguing that countries facing financial crisis experience rapid growth than those whose financial conditions are stable. The crisis is measured by a credit growth in skewness affecting the GDP negatively. The link between crisis and growth is explained through a model showing how problems of contract enforce-ability bring about borrowing constraints and promote growth. Countries that have their borrowing constraints relaxed by systemic risk-taking leading to an increase in investment are financially liberalized with a moderate contract enforceability degree. It fastens growth but also increases incidences of crisis.

Difference in Views of Systemic Crisis

Both of the above explanations describe systematic crisis as a financial crisis. However, the difference comes where one views the systemic crisis as a risk that threatens a company's growth since it can cause the whole company to fall in case of a leakage in one of its entity. On the contrary, systemic crisis is seen to increase growth to any company experiencing the same that is explained by contract enforceability.

Power and Authority

Weber and Foucault are individual thinkers who view power and author from different perspectives that are complementary. Weber says that power draws its existence from bureaucratic instruments while Foucault argues that power exists everywhere in the society, having discursive elements that should be internalized. Weber defines power as having the capacity to command someone to do something he would not do. He differs with Foucault's understanding of power since he physically shapes power.

Foucault's Understanding of Power

Foucault, on the contrary, argues that power is not only about legislation and bureaucracy. He recognizes the relationship between rationalization and the power vested in the society. The most important point of Foucault's understanding of power is its discursive executions. He insists that power relations are not obtained from state practices but are under the control of the state. It implies that control enhances power through disciplines that is necessary for building social systems. He says that technological advancement and rationalism allow for control and dominance. He also shows how our everyday practices legitimize the powers invested in us.

Importance of Power Relations and Authority

However, both thinkers stress the importance of power relations and authority in modern societies. Weber uses the concept of bureaucracy to explain power, saying that authority and strength are bureaucratic practices, not only found in the state apparatus but also in modern society, while Foucault insists that power is vested in the social relations system.

April 06, 2023

Business Economics

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Risk Organization Bank

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