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Assessing the Latest Systemic Risk Assessment

By DTCC Connection Staff | 6 minute read | June 12, 2024

Key Takeaways:

  • First launched in 2013, DTCC’s Systemic Risk Barometer Survey tracks risks that may impact the safety, resilience and stability of the global financial system.
  • Geopolitical risk, inflation, U.S. political uncertainty and cyber risk were the top four threats in the 2024 forecast.
  • At mid-year, industry experts weigh-in and assess how these predictions have mapped to actual developments so far.
Assessing the Latest Systemic Risk Assessment

In late 2023, DTCC released the results of its annual Systemic Risk Barometer Survey, which asks risk experts from across the financial services industry to identify what they see as the top threats for the coming year.

The good news? The experts surveyed turned out to be fairly accurate in predicting the greatest risks in 2024. The bad news? The experts surveyed turned out to be fairly accurate in predicting the greatest risks in 2024.

Related: How AI is changing the cyber threat landscape

Survey respondents identified the top four threats to the financial services industry in 2024 as geopolitical risk, inflation, U.S. political uncertainty / the 2024 U.S. presidential election and cyber risk.

“While the financial markets have remained resilient to the risks identified in the survey, there remains a systemic risk concern that could arise out a combination of high inflation and energy prices with a shock such as an economic downturn, geopolitical event or large-scale cyber event,” says Tim Cuddihy, DTCC Managing Director and Group Chief Risk Officer. “But some have worsened.”

Navigating Global Uncertainty

The 2024 barometer listed geopolitical risk as number one for the second year in a row, with 81% of respondents naming it the greatest threat – up from 68% the prior year. “The situation has only intensified since the survey,” says Cuddihy. “The war in Ukraine has worsened, and now we have an escalated conflict in Gaza.”

But open conflict is not the only way geopolitical risk can manifest and affect the market.

“Aside from war, de-dollarization is clearly a goal our adversaries would like to facilitate,” says Robert Akeson, Managing Director at Riverside Management Group. “Sanctions don’t work very well if you don’t need the dollar, and there are many actors who would go to great lengths to find some way to not be subject to U.S. government policy. When push comes to shove, the dollar’s liquidity wins, but if you look at history you can see the dollar rose to prominence after the Pound Sterling fell from its perch following World War I. This could happen to the dollar.”

Inflation came in second, with 55% of respondents naming it as the top risk for the year, down slightly from 61% the year before.

“I definitely think inflation is the biggest issue right now,” says James Tabacchi, President & Chief Executive Officer, South Street Securities. “And, inflation can get worse with geopolitical risk. We may see further supply chain constraints and restrictions on trade. (U.S. Federal Reserve Bank Chairman Jerome) Powell is walking a tight rope trying to control inflation, but I think the longer inflation persists, the greater the risk. No matter how good you are, you can’t keep walking a tight rope for long.”

Close behind inflation was U.S. political uncertainty / the 2024 U.S. presidential election, named by 51% of respondents as the top threat, climbing significantly from just 21% the year before.

“There are usually patterns we can easily discern in the four-year presidential election cycles,” says Akeson. “But this one is truly unique. There is tremendous anxiety about the upcoming election, and it’s only going to get worse.”

Continued Presence of Evolving Cyber Risks

Cyber risk followed only slightly behind U.S. political uncertainty, with 50% naming it as the top threat. It is notable that respondents have identified cyber risk as among the top five threats every year since the survey started in 2013.

“Ransomware is the new Jesse James,” says Akeson. “He just doesn’t have a six-shooter, but these guys are essentially digital bank robbers. These security risks are not going away, and in fact, they are probably getting worse.”

Even in 2023, we saw an uptick in market disruption from cyberattacks. First, financial services software provider ION was hit by a ransomware attack that lasted over a week, with hacking group LockBit claiming responsibility.

ION is an unlisted company based in Dublin, offering data and other services to financial industry clients who use that technology to facilitate trading and settlement of exchange-traded derivatives. The attack halted these processes for ION clients, leaving some unable to complete trades.

“Being knocked offline for a week created quite a bit of market disruption,” says Will Acworth, Senior Vice President of Publications, Data, and Research at the Futures Industry Association (FIA). “ION may not be a huge player in the market, but many of its customers are, and not being able to complete trades created a lot of problems.”

Indeed, news media reported that the Commodity Futures Trading Commission (CFTC) delayed publishing weekly trading statistics because some ION customers were not able to collate information fast enough to compile daily positioning reports.

In November 2023, the same hacker group reportedly hit the Industrial & Commercial Bank of China’s U.S.-based broker-dealer. ICBC is the world’s largest lender by assets. In the wake of these and numerous other attacks, in February of 2024 the U.S. Department of State offered rewards of up to $15 million for information leading to the identification or location of LockBit members. This was followed in early May of 2024 by an announcement of sanctions against a key leader of the LockBit ransomware group.

The recent boom in availability of AI tools has greatly magnifies the cyber risk – going beyond threat actors using it to commit fraud.

“AI-driven fraud using tools such as deepfakes can have real implications for the financial industry,” says Drew Propson, Head, Technology and Innovation in Financial Services at the World Economic Forum. “Trust is very important in financial services. If people lose trust in their financial institutions, we may see them go outside the mainstream, well-regulated financial sector. We don’t want to see people move outside our stable, established financial institutions, but lack of trust can do that.”

Assessing the Impact

The good news, however, is that the wider market probably also forecasted the same risks our survey respondents saw and may have baked those into expectations.

“The potential for systemic risks requires increased stakeholder engagement in managing risks and achieving shared outcomes. Key industry initiatives like reducing the equity settlement cycle, expanded use of US Treasury clearing, and advancing digital asset development all require collaboration and coordination among stakeholders to deliver measured risk mitigation and purpose-driven outcomes,” says Cuddihy.

Indeed, even though some predictions turned out to be even worse than expected, those worse-than-expected developments did not always impact the markets. The survey was conducted before the October 7 Hamas attack that kicked off months of conflict in Gaza, spreading to include direct conflict between Iran and Israel.

“Most people would assume that if there is conflict in the Middle East, oil prices will go through the roof,” says Acworth. “That hasn’t happened. Oil prices have remained remarkably stable.”

Indeed, West Texas Intermediate Crude oil prices have risen only slightly in 2024, from around $72 per barrel in January to about $76 in May.

U.S. political uncertainty may also not turn out to be as big a risk as expected.

“We’ve looked at past presidential elections,” says Propson. “We found they generally do not have as big an impact as people expect.”

Inflation may also not be impacting markets as much as respondents expected.

“Inflation has remained persistent,” says Cuddihy. “It hasn’t improved as many people expected, which impacts previous expectations of June interest rate cuts, which the market now expects may not happen until later in 2024.” Despite inflation forecasts, the Dow Jones Industrial Average has climbed from around 37,000 in January to just over 40,000.

While survey respondents delivered some very prescient predictions, it appears the negative impact of those predictions may not be as severe as some expected.