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