Broad geopolitical risks, including the outcome of Tuesday’s US presidential election and the UK’s exit from the European Union (EU), aka Brexit, are among the top risks facing the global financial system, according The Depository Trust & Clearing Corporation (DTCC).
The post-trade market infrastructure for the global financial services industry has issued its Systemic Risk Barometer Surveys since 2013; the most recent survey was completed by a range of domestic and international participants across the global financial services industry in the third quarter of 2016.
Other geopolitical risks mentioned by respondents include instability in the Middle East, the impact of the ongoing refugee crisis across Europe, and the influence of Russia and China on global relations and the world economy. Many highlighted the unpredictable nature of world events, citing the potential for sudden escalation that could cause global market volatility and instability.
Cyber risk remained the top overall risk, with 22% of respondents citing it as the single biggest threat to the industry and 56% rating it a top five concern, consistent with survey results from DTCC’s previous poll last April.
While financial services firms continue to make significant investments in cyber security defences, respondents expressed concerns that the evolving nature and sophistication of cyberattacks could place the industry at greater risk. The threat is particularly acute for the financial industry due to the interconnected nature of global markets. One respondent commented: “A cyberattack against a key market participant could precipitate systemic risk and de-stabilise markets.”
“While cyber threats and geopolitical concerns are distinct risk categories, they can also converge and materialise in combination with each other,” said Michael Leibrock, managing director and chief systemic risk officer at DTCC.
“Several respondents rightfully point to the growing incidence and sophistication of state-sponsored cyberattacks as a particularly worrisome trend that is emerging at the intersection of both areas of risk,”
Concerns rise over central bank policies
The risks of economic slowdowns within the US, Asia, and Europe appear to have eased over the past six months, with results returning to levels seen last year. However, respondents increasingly cited concerns about central bank monetary policy, including the divergence of policies between the US Federal Reserve and global central banks, as well as the corresponding impact on growth.
Investment in and development of systemic risk capabilities continues. Two in three respondents said they have increased the amount of resources dedicated to identifying, monitoring, and mitigating systemic risk over the past year, a trend consistent with prior surveys. Additionally, 61% indicated their firm’s ability to identify, assess and manage both current and emerging systemic risks remains in progress.
“The results from DTCC’s most recent survey have shown that the financial system, broadly speaking, continues to be increasingly interconnected, with new risks emerging and affecting the overall level and nature of systemic risk,” said Leibrock.
“While it can be difficult to predict with certainty when and how these newly emerging risks will impact the financial system, it is crucially important that firms continue to focus on implementing tools to detect and identify them as early as possible.”
Companies have only a limited time to complete their preparations before the UK departs the EU, warns Marsh executive Mark Weil.
The bank and the International Financial Corporation are continuing the eight years old trade finance partnership with a further investment.
Although the EU’s Markets in Financial Instruments Directive (MiFID II) is now better understood by asset management firms, too many grey areas still surround the regulation, claims Linedata.
European insurers are likely to use it increasingly in response to the capital adequacy requirements of the directive, reports Fitch Ratings.