ECB staff, combining available literature and practical experiences, has developed a conceptual framework that relies on three mechanisms that can lead to systemic financial instability: risk coming from large aggregate shocks, contagion risk, and  BIS central bankers’ speeches  1  the risk from the unravelling of widespread financial imbalances that have built up endogenously over time.1 Contagion occurs when the failure of one institution “infects” other hitherto “healthy” institutions.
Prominent recent examples of the materialisation of contagion risk include the drying up of interbank funding following the collapse of Lehman Brothers. Large aggregate shocks have always been an important source of widespread financial instability through history. Gorton (1988) documented how negative economic news were the best leading indicators of the likelihood of banking panics in 19th century USA.