The term Systemic Risk refers to the vulnerability of the Ugandan financial system to risks that affect the whole system and can lead to a systemic crisis, as opposed to risks that remain in isolated sectors or institutions. A systemic crisis involves the failure of one or more financial institutions which comprise a major part of the financial system, as a consequence of which the key functions of the financial system are impaired, resulting in significant costs for the real economy.
Systemic risk can arise from both external and internal events. External events such as disruptions from the global market may affect the operations of the Ugandan financial system. Internally, if different financial institutions, especially systemically important banks, within the financial system have a common exposure to a certain risk, it can result in the joint failures of these institutions. In addition, risks can build up over time and in most cases, these risks are often masked by the good performance of the economy. This creates vulnerabilities that can materialise into system-wide losses when asset prices fall or because of some other trigger, such as a downturn in the economy or a balance of payment crisis. Therefore, the presence of both the external and internal factors means that the financial system to a great degree is susceptible to systemic risk.