These four risks -- of 2 Cs and 2 Ls -- are important. At the BSP, we refer to them as “CL-2 risks”. These CL-2 risks are systemic because exposures to them are formed through a chain of bilateral transactions. Once any single point of the chain is compromised, the entire chain is weakened.
Monitoring this chain of counterparty dealings is a challenge for each institution, but it is precisely the basis for systemic risk that concerns regulators. An added challenge is that financial stability cannot be defined in absolute terms. Building core competencies therefore will be an exercise not only of “what is” but increasingly more of “what can be”.