Question

Explain why the credit crisis caused concerns about systemic risk.

Answer 1

The investeres weren't interested in investment in debt related securities due to the doubt that this type of security may default in future. As the inflow from various investors declined, the market for debt security became liquid in the secondary markets. The sellers were more and the buyers of these securities were less and thereby leading to no demand for these securities. This has led to the risk of the entire system as the prices of these securities declined due to lack of demand. Even the mortagage securieties did not perform well as there were many defaults and those investors who held this type of securities were also put into heavy losses.