There are five factors for systemic risk. Here they are:
- Asset size of the institution, including synthetic exposures.
- Degree of leverage of the institution, including synthetic exposures.
- Asset-Liability mismatch, particularly financing long assets with short liabilities (including derivatives and margin agreements — think of AIG, or mortgage REITs on repo).
- Degree to which the institutions owns financial companies equity or debt, or vice-versa, where other financial companies have claims on the institution in question.
- Riskiness of the assets owned by the institution in question.
Contributing to the risks include easy monetary policy, which can lead/has led to the neglect of risk control. Personally, if I were a regulator of systemic risk, I would throw my effort at companies that fit factors 1 and 2, and analyze them for the other three factors.
Systemic risk is layered levered credit risk. A lent to B, who lent to C, who lent to D, who financed a bunch of bad mortgages.
#5 is underwriting risk
#4 is connectedness risk
#3 is liquidity risk