DTCC’s annual Systemic Risk Barometer Survey identified the most significant threats to financial services in 2024 to be: geopolitical risks, inflation, US political uncertainty (specifically the upcoming U.S. Presidential election) and cybersecurity. In a Q&A with Tim Cuddihy, managing director and group Chief Risk Officer at DTCC, we explore the survey results in more detail including the underestimated risks, surprising findings and advice for monitoring potential systemic risks in 2024.
Q. Geopolitical risk was cited as the overall top risk for the second year in a row with inflation cited as the second most important overall risk to the global financial system in 2024. Have these risk types increased compared to last year’s survey? Do you find this result surprising? Why or why not?
A. In this year’s survey, the prominence of geopolitical risk has surged, cited by 81% of respondents as a top-five risk, a significant increase from 68% last year. Furthermore, 47% of respondents identified geopolitical risk as the primary risk impacting the global financial system in 2024. This result is consistent with what we are seeing in the ongoing geopolitical landscape, including heightened global tensions and conflicts that continue to impact markets.
Conversely, inflation, still a substantial concern, was cited by 55% of respondents as a top 5 risk, which represents a decrease from 61% in the previous year. This decline can be attributed in part to the proactive measures taken by central banks to curb inflation. Notably, many respondents anticipate inflation rates will continue to decrease over the coming year.
Q. Did survey respondents comment if they were actively seeking out risk mitigation strategies (new or enhanced) for any of the top 5 risks highlighted?
A. It’s important to clarify that the survey didn’t explicitly ask respondents about their individual strategies for mitigating the top risks they identified. Therefore, we do not have specific findings in the survey data that directly answer this question. However, based on ongoing discussions in the industry and my understanding of how firms typically respond to such risks, it’s evident that there is a significant focus on prioritising these risks within firms, as well as an active interest in exploring and implementing new or enhanced risk mitigation strategies amongst the industry.
Q. What about cyber risk?
A. While cyber risk was identified as the fourth most frequently cited risk in this year’s survey when compared to other threats, it’s worth noting that its rating marginally increased from 47% last year to 50% this year. This persistent area of concern has ranked as a top threat every year since the Systemic Risk Barometer survey was launched. Given the continuous evolution of cyber threats, it’s likely that this trend will continue in the foreseeable future.
Q. Focusing on underestimated risks, the survey found sudden dislocation in the financial markets and disruption/failure of key market participants were identified as the top concerns. Can you elaborate on why these risks are underestimated?
A. In regard to a sudden dislocation in the financial markets and a disruption or failure of key market participants, respondents highlighted the inherent challenges in accurately predicting these types of risks, underscoring the complexity and unpredictability of such events. As a result, this can lead to a potential underestimation of risks. Moreover, the financial landscape is prone to sudden and unforeseen adverse conditions. Such developments can swiftly lead to dislocations and failures among key market participants, both of which can have a significant impact on the markets.
The impacts of these occurrences can be profound and widespread, emphasising the need for a continued understanding and assessment of these sometimes underestimated risks. This highlights the importance of continuous vigilance and adaptive risk management strategies in the financial sector.
Q. Were there any surprising findings out of this year’s survey?
A. The emergence of concerns around commercial real estate was a new development this year, with 34% of respondents identifying commercial real estate / housing markets as a top five risk (increasing from 19% last year). Many respondents noted the persisting challenges within the real estate market in many countries around the world that have impacted the sector, such as low occupancy rates and the evolving strategies post-Covid for various locations.
Q. How should market participants prepare for the risks outlined in the survey? What advice would you give them as we move into 2024?
A. In response to geopolitical risks and persistent threats, market participants should continue strengthening their cybersecurity capabilities by upgrading protection systems, encrypting data, and implementing robust backup strategies. Regular employee training to heighten awareness of cyber threats also remains essential. Simultaneously, firms should adhere to evolving global regulations and develop effective incident response plans.
Assessing the security of supply chains and investing in advanced technologies, such as artificial intelligence (AI), for threat detection is crucial. Managing cross-border data flows securely and fostering collaboration with other entities for information are also vital to further enhance cyber defenses. These measures collectively help to ensure operational resilience while meeting stringent regulatory standards.
Q. How is DTCC looking to respond to or actively monitor the risks outlined in the survey?
A. DTCC places significant importance on this survey as a key component of our systemic risk assessment. Specifically, DTCC’s Systemic Risk Office leverages these survey results to support its client outreach efforts and to benchmark its risk management initiatives against the concerns raised by respondents. These survey findings also play a vital role in shaping DTCC’s proactive approach to monitoring and addressing risks within the financial landscape.
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