Understanding the Asian Crisis: Systemic Risk as Coordination Failure

The vast array of financial regulations in the United States and other developed economies is justified largely as a way of protecting the public from the dangers of systemic risk or systemic crisis in financial markets. Even the title of a recent General Accounting Office report on financial derivative regulation ("Financial derivatives: Actions needed to protect the financial system" [GAO, 1994]) and images in the popular press (a close-up of a snake with jaws wide open on the cover of Fortune magazine) appeal to our fear of systemic risk. While many different (and often mutually contradictory) characterizations of systemic risk have been proposed, it is somewhat disturbing that we lack a consensus as to what, precisely, systemic risk is.