Strategic risk advisor Lawrence Habahbeh explores how financial institutions can build resilience against geopolitical shocks
Geopolitical risks are increasingly impacting financial markets and institutions. These events encompass a variety of geopolitical risk factors with varying nature, duration, immediate and higher-order cascading consequences, and severity across the real economy, financial markets, and the safety and security of personnel and physical infrastructure. They manifest in many forms, such as war, regional and local conflicts, terrorism, cyber warfare, geoeconomic tools, and traditional political risk factors.
For financial institutions, these risks impact market, counterparty, liquidity, credit, operational, and insurance risk factors, including surrender values, claims, premiums, and underwriting. To mitigate the impacts of these geopolitical risk factors, organisations require a robust impact-based geopolitical risk assessment to decipher their financial and operational risk sensitivity to various geopolitical shocks. This assessment should be augmented with a scenario-based futures analysis to test a range of plausible but severe geopolitical scenarios, identifying financial and operational vulnerabilities.
This type of geopolitical risk analysis necessitates a granular view or map of not only investment risks but also operational risks, particularly dependencies on critical third-party service providers. As the geopolitical risk landscape evolves, the likelihood of direct and indirect impacts increases. Identifying critical third-party dependencies, connections, and financial linkages sensitive to geopolitical shocks becomes paramount to maintaining financial and operational stability.
In a webinar on 10 March about navigating geopolitical risk, we introduced a framework for geopolitical risk preparation and assessment. This framework aims to identify, evaluate, anticipate, quantify, and mitigate geopolitical risks using a blend of theoretical frameworks and practical, real-world applications. By doing so, organisations can enhance their financial and operational resilience profiles to withstand, adapt, and learn from geopolitical disruptions.
