When markets are volatile there can sometimes be domino effects that lead to even more turmoil. A compounding trend if you will where fear begets more fear.
This is financial contagion, a term that has been headline fodder in relationship to the banking crisis of 2023, that so far, has seen two regional banks fail abruptly. The Asian financial crisis in 1997 is another historical example.
The definition of financial contagion is a scenario where one economic or market driven crisis subsequently impacts another market and spreads impactfully thereafter.
An illustration of financial contagion is when a few institutions, such as commercial banks, incur a shock that causes panic about the health of the broader banking industry. As the concern and panic spreads, there are ripple effects that extend into other areas of the economy/markets.
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