Final answer:
The Dodd-Frank Act, Solvency II, and Basel III are regulatory frameworks aimed at reducing systemic risk in the financial system. They enforce requirements such as greater capital adequacy and risk management to prevent market collapses. The correct answer to the question is D. Systemic risk.
Step-by-step explanation:
The Dodd-Frank Act, Solvency II, and Basel III are all regulatory frameworks designed to enhance the stability of the financial system. Each of these measures aims to reduce systemic risk, which is the risk of collapse of an entire financial system or entire market, due to the failure of a single entity or group of entities, which can lead to a cascading effect on other entities. To prevent such scenarios, these regulations enforce various requirements on financial institutions, including increased transparency, improved capital adequacy, and more effective risk management processes.
The financial crisis highlighted problems like moral hazard, where entities take on excessive risk because they believe they will be bailed out if their bets fail. In response, regulations such as the Dodd-Frank Act have increased the oversight and protections in the banking sector to minimize this risk. By implementing stronger capital requirements, stress tests, and living wills for banks, regulations aim to ensure banks are more resilient and less likely to need government intervention. As a result, the correct option in the given question is D. Systemic risk, as these regulatory actions are fundamentally designed to protect the entire financial system from failures that could potentially lead to widespread economic disruption.