Examples of systemic risks
Real property as collateral
Higher house prices increases the value of a bank's collateral and reduces its risks. That may increase the bank's appetite for lending for housing purposes. But when many banks' appetite for lending for housing purposes increase, it may result in increasing prices, which in turn may further increase banks' appetite for lending. A self-reinforcing spiral, and potentially a housing price bubble, can thus be created, which in the long term can be detrimental to the financial system and the economy as a whole. A possible intervention in a scenario of sharply rising housing prices could be to require higher risk weights on mortgage loans, so the banks in such a situation would hold more capital when they are lending for housing purposes.
In times of positive economic outlook, banks are typically willing to lend more. When loans exceed deposits, banks operate with a deposit deficit and finance themselves at the financial markets. This can be a vulnerable business model during downturns where financial markets have a tendency to "freeze" due to general uncertainty about the state of the banking sector and a general need to reduce balance sheets and risks in times of crisis. Such a scenario complicate banks' funding conditions, reduce access to liquidity and, in turn, increase the need for banks to reduce their balance sheets. Possible instruments to deal with such risks could be, for example, limiting banks' exposure against one another, increasing the risk weights for such exposures, or imposing specific requirements on how much liquidity banks at any time should have.