Systemic risk: a limitation of traditional risk management practices

Systemic risk in financial services

Financial systemic risk models should consider the impact of new megatrends and the increasing interdependencies of different types of risk.

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Over the last 40 years, many significant financial or economic crises were not foreseen or prevented. Post mortems reveal that risk models were over-reliant upon historical data, and failed to consider emerging macroeconomic, sociopolitical and other megatrends. 

Traditional risk management methodologies also underestimate systemic risk caused by an increasingly interconnected world. These interdependencies have a contagious effect across countries and financial systems, making crises deeper and recovery slower. 

Drawing on personal experience

It is no longer enough to simply crunch numbers; risk models should also incorporate the insights of senior managers that have experienced crises first hand.

And risks cannot be looked at in isolation. They tend to combine with each other in “risk clusters” that heighten their impact. Regulators are increasingly seeking more sophisticated risk analyses in stress and scenario testing, particularly for going concern analyses and capital adequacy assessments. 

Predicting the next crisis

Today’s financial systems are extremely complex, due to globalization, market liberalization and technology. This also makes them more unpredictable, so organizations need systemic risk models and associated controls that:

  • Highlight emerging risks
  • Evaluate the potential impact of emerging megatrends such as quantitative easing, aging populations, new regulations, population growth, technological advances and changing weather patterns
  • Identify the composition and impact of risk clusters. 

Does your organization

  • Routinely report systemic risk to risk committees and the board?
  • Employ systemic risk models that embrace current data and future predictions?
  • Produce risk cluster analyses?

To discuss these questions further, please contact:

Andries Terblanche

Partner

KPMG in Australia

+61 2 9335 7570

 

Jacinta Munro

Partner

KPMG in Australia

+61 3 9288 5877

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