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What does a financial contagion refer to?

Updated: 8/20/2019
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10y ago

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The term 'financial contagion' refers to a situation in which some financial institutions or a certain region of the economy are affected by small shocks, which then spread to other institutions and/or regions of the economy, with the potential to spread from one country to another. The imagery of a financial contagion is similar to the use of the term 'contagion' in medicine, where it refers to the spread of an infection. The threat of financial contagion is one of the main reasons for financial regulation to exist.

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