FMRI ( T) Essay Example | Topics and Well Written Essays - 2500 words

FMRI ( T) - Essay Example Therefore, it is needed to be avoided for preventing the future banking crisis. For this purpose, the proposals have been suggested in the second part of the paper. It is suggested that the division of bank into commercial and investment banking has fewer risks and it is a desirable option in contrast to the unified banking which is more risky but fostered more growth of the banks. The paper is meant to discuss the serious issue of banking crisis and suggest ways to mitigate the chance of future economic crisis globally. For this purpose, the paper covers two major sections in which the first part explains the term systemic risk and systemically important financial institutions. However, the second part describes and evaluates various proposals for introducing banking reforms concerned with the separation of the commercial banking and investment banking sector. The systemic risk can be defined as the condition in which the entire financial setup receives a major setback (Cox, & Larsen, 2011). It can be contrasted to the risk of damage done to the one financial aspect only and implies the collapse of a whole financial system. In other words, it is the major financial downfall which results from the various external and internal causes. It has also been described as the financial instability or disruption of a financial system which is generally catastrophic in nature. Hendricks (2009) has defined systemic risk in following words: "A systemic risk is the risk of a phase transition from one equilibrium to another, much less optimal equilibrium, characterized by multiple self-reinforcing feedback mechanisms making it difficult to reverse." The definition given above used theoretical terms to explain the concept of systemic risk and does not include economic terms in it. However, it suggests that systemic risk is the type of risk which can occur when a particular change occurs in terms of a transition from one phase to