ERM Glossary: Contagion

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Contagion refers to a situation where occurrence of one risk leads to occurrence of another.

It can refer to contagion between different entities within the same corporate group (e.g. failure of a group company can disrupt activity at another, leading to other types of risk becoming manifest.

More usually, it refers to a spiral across companies and potentially across entire economies. For example, failure of one or more key financial institutions may lead to failures in other firms or a broader weakness in the real economy. Contagion is particularly great when asset values are very sensitive to confidence as is the case for banks and for sovereign borrowers.

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