The Life Cycle of Systemic Risk

We present a life cycle view of how systemic risks build during a boom, are realized during the following crisis, and are addressed in the aftermath. We also offer potential explanations of the seemingly irrational behavior by private-sector agents and policy makers. We show how the model applies to three global crises over the last 100 years. We also review research on how systemic risks build and the policy tools to combat these risks, including resolving financially distressed financial institutions and instituting “first lines of defense” to prevent such distress in advance. We conclude with research and policy suggestions