Broad geopolitical risks, including the outcome of the US presidential election and Britain’s exit from the EU, are among top risks facing the global financial system, according to a survey by The Depository Trust & Clearing Corporation (DTCC).
Other geopolitical risks that were mentioned 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.
Respondents 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 per cent of respondents citing it as the single biggest threat to the industry and 56 per cent rating it a top five concern, consistent with survey results from DTCC’s last poll conducted six months ago. While financial services firms continue to make significant investments in cyber security defences, respondents expressed concerns that the evolving nature and sophistication of cyber attacks could place the industry at greater risk. The threat is particularly acute for the financial industry due to the interconnected nature of global markets.
As one respondent said: “A cyber attack 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. Several respondents rightfully point to the growing incidence and sophistication of state-sponsored cyber attacks as a particularly worrisome trend that is emerging at the intersection of both areas of risk,” says Michael Leibrock (pictured), managing director and chief systemic risk officer at DTCC.
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. About 66 per cent of those surveyed said they have increased the amount of resources dedicated to identifying, monitoring, and mitigating systemic risk over the last 12 months, a trend consistent with prior surveys. Additionally, 61 per cent 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. 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,” says Leibrock.
DTCC has been conducting Systemic Risk Barometer Surveys since 2013. The most recent survey was completed by DTCC clients and a broad range of domestic and international participants across the global financial services industry in Q3 2016.