Systemic risk refers to the potential for a major disruption in the financial system that can lead to widespread instability. This type of risk arises when the failure of one institution or market can trigger a chain reaction, affecting other interconnected entities. For example, the collapse of a large bank can impact other banks, investors, and the overall economy. Factors contributing to systemic risk include high levels of debt, interconnected financial institutions, and lack of transparency. Regulatory bodies, such as the Federal Reserve or European Central Bank, monitor these risks to prevent crises and maintain financial stability.