FINANCIAL AND ECONOMIC RISKS: A CRS RISK OUTLOOK
2
A Journey Started From Crisis
Real GDP Growth Rates in 2009Source: Wikipedia
3
The Interconnected Financial System
Source: Medical News Today
4
Financial Contagion
Capital
Reserves
of Banks
100%
0%
50%
2008 2009 2010 2011 2012 2013 2014
External Assets
Inter-Bank Lending
Fire Sale
For a shock of 0.5% asset devaluation
Olaf Bochmann: Cambridge Banking Model
Source: Roger Beale
5
Macroprudential Regulation
Source: Office of Financial Research
6
Global Systemically Important Banks (G-SIBs)
HSBC
JP Morgan ChaseFSB Bucket 4
BNP Paribas
Barclays
Deutsche
Bank
CitigroupFSB Bucket 3
Mitsubishi UFJ FG
Royal Bank of Scotland
UniCredit
GroupUBS
Bank of America
Credit Suisse
Morgan
Stanley
Goldman Sachs
FSB Bucket 2
ICBC
Bank of China
Sumitomo Mitsui FG
Société GénéraleSantander
BBVA
ING Bank
Mizuho FG
Standard
Chartered
Nordea
Wells
Fargo
New York Mellon
State Street
FSB Bucket 1
Source: FSB 2016; Cambridge Centre for Risk Studies Analysis
7
Beyond Financial Markets
60
65
70
75
80
85
90
95
100
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2015 2016 2017 2018 2019 2020 2021 2022 2023
GD
P
(US
$ 2
010,
Tn
)
1907 US ‘Bankers’ Panic’
1873 Long Depression
1893 Baring Bank Crisis
2008 Great Financial Crisis
1929 Wall St Crash
GDP@Risk US$ Trillion
1893 Baring Bank Crisis 5
1873 Long Depression 7
1907 US ‘Bankers’ Panic’ 14
2008 Great Financial Crisis 20
1929 Wall Street Crash 30
8
Oil Price in the Past Decade
0
20
40
60
80
100
120
140
Cru
de
Oil
Price
Ave
rag
e,
$/b
bl
Source: World Bank 2019
2008 Great Recession
2014 Oil Price Crash
9
“Energy” in the Next Decade
National Geographic CFA Institute
European Financial Review The Independent
10
Cambridge Global Risk Index (CGRI)
0
20
40
60
80
100
120
140
160
180
200
Natural Catastrophe Financial, Economics &Trade
Geopolitics & Security Health & Humanity Technology & Space
GD
P@
Ris
k, $
Bill
ion
s
20
15
20
16
20
17
20
18
20
15
20
16
2017
20
18
20
15
20
16
20
17
20
18
20
15
2016
20
17
20
18
20
15
20
16
20
17
20
18
20
19
20
19
20
19
20
19
20
19
Natural
Catastrophe
Financial,
Economics & Trade
Geopolitics
& Security
Health
& Humanity
Technology
& Space
11
▪ Market Crash
‒ Asset Bubble
‒ Financial Irregularities
▪ Economic Recession
▪ Economic Restriction
▪ Trade Sanctions
▪ Tariff War
▪ Commodity Price Fluctuations
▪ Sovereign Crisis Default
▪ Investor Sentiment
‒ Negative Market Outlook
▪ Low Carbon Transition
Financial & Economic Threats
▪ Disruptive Competitor
▪ Aggressive Competitor
‒ Price War
▪ Counterfeit Products
▪ Creditor Failure
▪ Customer/Client Failure
▪ Government Failure
▪ Supplier Failure
‒ Bargaining Power Against Suppliers
‒ Supply Chain Disruption
Macroeconomic Competition
Counterparty
Image Source: Wall Street Mojo (Left) The Balance Small Business (Right)
12
Stress Testing the Future in Scenarios
0%
5%
10%
15%
20%
25%
Tariff Range (%)
£0.15 Bn
£0.49 Bn
£0.99 Bn
£2.60 Bn
£0.06 Bn
£0.28 Bn
£1.41 Bn
Geopolitics and Security
India-Pakistan Conflict
Environmental
Flooding of Key FacilitiesGovernance & Liability
Gender Pay Dispute
Finance and Economics
US-European Trade War
Trade tariffs imposed
on imports between
US and Europe
Military conflict in India
subcontinent causes market
depression and loss of
assets in India subsidiary
Key distribution and
production facility for major
lines of products are made
unserviceable by floods
Company’s pay disparity
between genders gives rise
to employee action and to
reputational loss
Geopolitics & SecurityFinance & Economics Technological
Environmental Social & Humanitarian Governance & Liability
Social & Humanitarian
Severe Pandemic
Extended staff absenteeism
from illness and fear, with
economic demand shock
Technological
Cyber Attack Contagious Malware
Diskwiper payload infects
many endpoints in the
company’s network and
central ERP system 10% tariff on products
40% tariff on products
20% tariff on products
140% tariff on products
S1
S2
S3
0.8 m depth, 2 weeks, clean
1.3 m, 3 mths, mod contam
>1.5 m, 12 mths, high contam
S1
S2
X1
X1
S1
S2
X1
Class action and protests
Strikes affect production
Consumer demand reduces
S1
S2
X1
Regional war
National conflict
High casualty nuclear
S1
S2
X1
S1
S2
X1
Infection disables ERP 4 days
All systems down 10 days
System rebuild 3 wks
Standard response
Slow response
Slow response and vaccine is
not effective
£0.38 Bn
£0.88 Bn
£2.45 Bn
£0.04 Bn
£0.41 Bn
£1.05 Bn
£0.10 Bn
£0.22 Bn
£0.84 Bn
13
“An emerging risk is a new risk, changing risk, or novel combination of risks where the broad impacts, costs and optimal management strategies are not yet well understood.”
CCRS
“Anything that can go wrong will go wrong.”
Murphy’s Law
Connecting the Past to the Future
Source: Stephanie Huesler
14
Session Speakers
Discussant: Dr Andrew Pitt
Head of Global Research, Citi
Financial Crises of the Future: the Lessons of History
Dr Duncan Needham, Director, Centre for Financial History▪ Case studies of financial crises in history
▪ Fundamental changes over time within western banking
▪ Discussion about the next major financial crisis
Challenges in Managing Financial Risk in the Future: A Practitioner’s Perspective
Dr Alessandra Mongiardino, outgoing Head of Enterprise-wide Risk Management,
Nordea Bank Abp▪ Non-financial risks in financial risk management
▪ Risks and opportunities of digitalisation
▪ Commercial risks to a financial firm’s future profitability and viability