A bank, an insurance firm, or any type of financial institution that are identified by a regulatory authority as potentially important within the financial sector so that its collapse or failure would create a significant threat to the sector and the economy at large. This threat may take the form of a trigger of a wide-spread financial crisis (e.g., a chain effect of collapses of other institutions).
The systemic importance of an institution depends on a set of factors including its size, interlinkages with the other institutions in the financial system (systemic interconnectedness) and the broader economy and the substitutability of its products/ services, etc, as determined by the relevant authorities due to its potential role, if failed to orderly function or operate, to cause a significant disruption to the financial system and economic activity.
These institutions are also known as systemically important financial institutions (SIFIs).
