What type of risk refers to the potential for instability in the entire financial system, rather than just individual firms?

Systemic risk is the type of risk that highlights the potential for widespread instability within the financial system as a whole, rather than focusing on the issues faced by individual firms. This risk arises from factors that can lead to a collapse of an entire market or financial institution, often triggered by economic downturns, interconnectedness of financial entities, or significant failures within major institutions that can lead to a chain reaction affecting other firms and the economy.

For example, the 2008 financial crisis illustrated systemic risk, as the failure of major banks and mortgage companies did not just affect those entities but resulted in a broader economic downturn that impacted numerous sectors globally.

The other types of risks mentioned, such as market risk, credit risk, and operational risk, primarily focus on risks affecting individual companies or specific portfolios. Market risk relates to fluctuations in market prices affecting individual investments, credit risk involves the potential that a borrower may fail to meet their obligations, and operational risk is associated with failures in a company's internal processes, systems, or external events. Unlike systemic risk, these types typically do not lead to the potential collapse of the entire financial system.