Systemic risk refers to the risk that could cause a widespread or major disruption in the financial system, potentially leading to severe financial stress or even a financial crisis. It is the risk that the failure of one financial institution could cause other financial institutions to fail, leading to a domino effect that could potentially destabilize the entire financial system. In the given scenario, Egda Bank and other banks in the sector are facing similar challenges due to unfavorable market conditions. This indicates that the risk is not specific to Egda Bank but is affecting the entire banking sector, which is a characteristic of systemic risk. Therefore, the situation described in the scenario is an example of systemic risk.

Choice A is incorrect. Maturity transformation risk refers to the risk that arises when financial institutions borrow short-term and lend long-term, creating a mismatch in the maturity of their assets and liabilities. This is not the case described in the scenario, where unfavorable market conditions are affecting all banks in the sector.

Choice B is incorrect. Balance sheet risk pertains to risks associated with assets, liabilities, and equity on a bank's balance sheet. While it's possible that Egda Bank may have balance sheet risks due to its declining financial performance, this does not explain why other banks in the sector are also facing challenges.

Choice D is incorrect. Banking sector liquidity risk refers to a situation where most or all banks within a specific banking system lack sufficient liquid assets to meet their obligations. The scenario does not provide any information suggesting that there's an industry-wide issue with liquidity.

Things to Remember

• Systemic risk is a crucial concept in risk management and refers to the risk of widespread financial instability or collapse due to interconnectedness and interdependencies within the financial system.
• Systemic risk can arise from various sources such as economic downturns, market