What does the term “systemic risk” refer to?

The term "systemic risk" specifically refers to the potential for a collapse in the entire financial system, which can result from various interconnected factors such as widespread failures of financial institutions or significant market disruptions. It emphasizes the interconnectedness of financial institutions and markets, where the failure of one entity or sector can lead to severe consequences for the entire financial system. This risk is particularly relevant during times of economic instability, where the repercussions can spread rapidly across borders and sectors, impacting the overall economy.

The other choices represent different aspects of financial risk. Individual investment loss pertains to idiosyncratic risks that affect only specific assets, while regulatory changes impact the operating environment for financial entities but do not inherently lead to systemic failures. Lastly, credit defaults, while significant, typically fall under credit risk rather than systemic risk, as they do not necessarily imply a widespread collapse of the entire financial system. Understanding systemic risk is crucial for market participants and regulators alike to mitigate the effects of potential financial crises.