Signature Bank in New York closed down: What is systematic risk?

The Signature Bank, which is based in New York, was shut down on Sunday amid the Silicon Valley Bank crisis. US regulators cited ‘systematic risk’, saying  that they took the step to prevent the spreading banking crisis.

“We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority,” Treasury, Federal Reserve, and FDIC said in a joint statement Sunday evening.

All depositors of Silicon Valley Bank and Signature Bank will be fully protected. Shareholders and certain unsecured debtholders will not be protected.

What is systematic risk?

Systematic risk, as per cfainstitute.org, ‘refers to the risk of a breakdown of an entire system rather than simply the failure of individual parts. In a financial context, it denotes the risk of a cascading failure in the financial sector, caused by linkages within the financial system, resulting in a severe economic downturn’.