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'Contagion threat': beware new risks from intertwined global finance

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The landscape for systemic financial risk has been “rapidly and profoundly” changed by interconnectedness, and risk managers must now carefully monitor greater cross-border financial exposures, fintech innovations and reliance on third-party vendors, a new whitepaper says.

Cybersecurity threats and Non-Bank Financial Intermediation (NBFI) are further dangers in an increasingly intertwined global finance world, the paper from the Depository Trust & Clearing Corporation (DTCC) says.

“We strongly recommend organising cross-functional risk reviews and discussions to identify interconnections and make sure that the associated risks are assessed comprehensively,” it says.

Greater cross-border financial exposures make countries that rely heavily on foreign capital more vulnerable to systemic shocks, it says, while innovations like distributed ledger technology and cryptocurrencies are increasingly interconnected with the wider financial system.

The industry’s increased reliance on third-party vendors, and a rise in the volume and sophistication of cyberattacks, exacerbates operational risk challenges, while NBFI represents “yet another channel of risk transmission” and this sector might play a role in “transmitting stress” throughout the financial system.

“It is more crucial than ever that firms continue to evolve their approach to managing risk, ensuring they’re taking a holistic, comprehensive view of all the relevant factors,” DTCC MD and Chief Systemic Risk Officer Michael Leibrock said.

Managing risk in such a deeply interconnected and ever-changing environment requires a multi-disciplinary approach with insight from a wide array of subject matter experts and that is built on close coordination between all stakeholders, DTCC says.

“Staying on top of emerging threats requires constant vigilance,” DTCC Systemic Risk Executive Adrien Vanderlinden said. “Firms should adopt a multi-disciplinary approach that leverages insights from a diverse group of subject matter experts while ensuring close coordination between stakeholders.”