Fintech’s potential impact on financial stability emerges as a new area of concern for 2018.
Geopolitical uncertainties in Asia, as well as prolonged uncertainties associated with Brexit negotiations, have positioned geopolitical risk as a top risk to watch in 2018, according to a new survey published by The Depository Trust & Clearing Corporation (DTCC), the premier post-trade market infrastructure for the global financial services industry.
Geopolitical risk ranks as the number two overall risk, with 69% of respondents including it in their top 5 risks for the coming year – a 17% jump since the last survey to an all-time high. Slightly over 20% of respondents view geopolitical risk as the top overall risk – a 5% increase from the last survey and a 10% increase from the Q3 2016 survey. “The instability and disagreement around the world certainly impacts the markets,” said one respondent citing difficulties in separating the headline risk from the actual situation, coupled with significant consequences of any escalation or misstep.
More than a third (36%) of survey respondents view cyber risk as the number one threat to the broader economy in 2018, with 78% of respondents ranking it as a top 5 risk – a 7% increase from the last survey. In response to this expanding threat, one respondent cited that “firms are making investments in safeguarding system access and part of that investment is the consideration of cyber insurance with their portfolio of risk mitigation strategies.”
“Cyber risk continues to intensify across all sectors of the financial ecosystem and it’s becoming increasingly clear that no area is immune to this threat,” stated Michael Leibrock, DTCC’s Chief Systemic Risk Officer. “As a result, it is critical that firms prepare response plans, maintain playbooks and practice cyber-attack simulations as key components of their risk management efforts.”
Fintech and Financial Stability
Fintech risk, which was included in this survey for the first time, was acknowledged as a significant source of risk by 15% of respondents. While fintech is generally recognized as holding great promise, these results demonstrate a growing awareness of potential emerging risks, highlighting the need to evaluate both risks and rewards associated with fintech initiatives.
As one respondent said, “The evolution of fintech has outpaced the ability of the financial services industry to adapt to such rapid changes. The risks potentially posed by fintech could have substantial impacts on the financial services industry and regulators will need to enhance their oversight capabilities for this emerging area.”
Looking ahead, a majority of respondents do not believe a destabilizing event will occur in 2018. However, they project a continued increase in spending over the next twelve months on identifying, monitoring and mitigating systemic risks, a continuation of the trend from previous surveys.
“Firms realize that managing risks and enhancing resilience requires continued vigilance, as well as additional investments,” Leibrock said. “That realization is evident by the projected uptick in spending on risk monitoring and mitigation.”
DTCC has conducted Systemic Risk Barometer Surveys across the global financial services industry on a semi-annual basis since 2013. The most recent survey was completed in Q3 2017.