Systemic and concentration risks play a significant role in the stability of the financial system.
We analyze these types of risk based on the direct and indirect interlinkages among counterparties and credit exposures. Systemic risk analysis can be a complex process. This is because a full analysis of the possible chain reactions among counterparties and exposures, after the default or downgrading credit event, is necessary.
Concentration risk can cause high losses and may heavily affect the financial system within a short period. In this chapter, we discuss systemic and concentration risks that arise from credit exposure and counterparties.As we will explain in this chapter, there are cases where contracts are linked directly or indirectly to several counterparties or other exposures; many counterparties or contracts can also be linked to a single exposure or counterparty. Such cases indicate systemic and/or concentration risk. Financial loans from marketplace lending are attached to many obligors; in other words, many counterparties are linked to a single exposure and underlying counterparty. At the same time, loans may have exposure to very similar counterparties who might act identically under stress. Yet it is unclear how exactly this may impact the financial system. Investors in marketplace loans should therefore think about potential exposure to counterparty risk and the mitigation of this risk.
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