GRA · Financial Stability
Spatial financeWhere capital meets hazard, exposure and transition
Financial-system transmission
A financial crisis moves in stages: a shock hits, vulnerabilities amplify it, stress spreads across institutions and markets, and the damage returns to the real economy, which feeds back into finance. Real-system shocks such as disasters, pandemics, energy disruptions and cyber incidents can start the sequence as surely as financial ones. This page shows how vulnerabilities propagate, as studied on Financial Stability by the Global Risks Alliance (GRA).
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From shock to system.
- 01
Shock
A real or financial event causes losses or uncertainty: a disaster, a default, an outage, a sudden repricing.
- 02
Amplification
Leverage, liquidity mismatch and stretched valuations turn losses into forced selling and funding withdrawal.
- 03
Contagion
Stress spreads through direct exposures, common holdings, funding markets and confidence.
- 04
Real economy
Credit contracts, spending falls, firms fail and unemployment rises.
- 05
Feedback
Real-economy damage raises defaults and lowers asset values, deepening financial stress.
Field overview.
The screen a team would use to follow this subject: its measures, states and decisions. Names are examples and values are illustrative.
When the financial system feeds the shock back.
Transmission does not stop at balance sheets. When banks cut credit and insurers withdraw cover after a large event, firms delay investment and households cut spending, which lowers income and raises defaults further. That feedback separates a contained loss from a crisis. Topic depth at real-economy feedback; macroeconomic evidence at GCRI trade and external shocks.
Where leverage now sits.
A growing share of credit and market intermediation happens outside banks. The FSB's July 2025 recommendations cover monitoring, leverage in core markets and the counterparty risk management of bank lenders to nonbanks. Topic depth at nonbank financial intermediation.
How stress travels between institutions.
| Channel | Mechanism |
|---|---|
| Direct exposures | Losses on loans, derivatives and securities issued by a failing institution |
| Fire sales | Forced selling depresses prices and imposes losses on all holders |
| Funding runs | Lenders withdraw short-term funding from institutions seen as exposed |
| Margin and collateral | Volatility raises margin calls, draining liquidity |
| Information | Uncertainty about who is exposed causes withdrawal from sound institutions too |
| Shared infrastructure | Failure of a payment, clearing or technology provider affects all users |
Channels describe mechanisms, not measured strengths.
Why the same shock can be mild or severe.
The size of a crisis depends less on the initial shock than on the state of the system when it arrives. High leverage, short-term funding of illiquid assets, stretched valuations and concentrated exposures turn moderate losses into forced selling and withdrawal of funding. A resilient system, with adequate buffers, transparent exposures and functioning backstops, can absorb the same shock with limited spillover. Analysis therefore looks at vulnerabilities before shocks, so that the industry understands where amplification would come from.
Where physical risk meets finance.
Shocks from outside finance can be large, correlated and sudden, and they often arrive with little warning in the financial data itself. A severe disaster can hit insurers, banks and public budgets in one region at once; an energy shock can raise defaults across industries; a cyber incident at a shared provider can halt services for many institutions. The evidence on these shocks comes from The Global Centre for Risk and Innovation (GCRI), for example on cascades and interdependence.
Analysis uses network science, agent-based modelling and scenario design with aggregated sector data. It does not assess individual firms, recommend transactions or constitute investment advice; see analysis and uncertainty.
Where this page's references lead.
The bodies and documents this page is read against. Status and editions change; each link goes to the issuing body.
Questions and answers.
Is this a forecast of the next crisis?
Why include non-financial shocks?
How does this relate to Banking Nexus?
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