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Risk Management Practices / Systemic Risk

Back to the Future: 2007 to 2030

Author:
Lois Tullo, Executive-in-Residence, Global Risk Institute

This paper has been prepared by Lois Tullo,  Executives-in-Residence at GRI. This is original research and applied theory authorized for GRI publication.

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  GRAFT-Back to the Future: 2007 - 2030
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An Overview of GRAFT was published by GRI in October 2017. Available on our website, this article should be read to provide an overview of the concept of the Global Risk and Trends Framework (GRAFT).


Are new financial risks foreshadowing a Systemic Risk Event?

 

Systemic risk is an inherent concern for the stability of the global financial system. Systemic financial risk involves a system-wide financial crisis, typically accompanied by a sharp decline in asset values and economic activity. Systemic financial risk involves the spread of instability throughout the financial system as a whole with results that are sufficient to affect the real economy.[1] Systemic events can be triggered by risks and trends outside of the financial sector, but may also result in a financial crisis. In this paper, we use the GRAFT Framework as a lens to compare and highlight the risks and trends that may be the cause of either a future broad systemic crisis or a narrower systemic financial crisis. We look at a comparison of the GRAFT matrix between 2007/08[2] and 2017/18 and three scenarios for 2030[3] to gain insight into potential systemic changes that may be on the horizon.

Manifestations of a systemic and systemic financial crisis are relatively rare. Historically, broader systemic crises have included WWI, and WWII, and the ongoing conflict in the Middle East; Famine in Africa through the late 80s and the HIV/AIDS global pandemic that has killed more than 36 million people since 1981.[4] In the past 30 years, systemic financial risk events have included the equity crash of October 1987 (“Black Monday”), the Japanese asset price collapse of the 1990s, the Asian financial crisis of 1997 and the Russian default of 1998 (which led to the demise of the LongTerm Capital Management (LTCM) hedge fund), the Credit Crisis of 2007/08, and the Sovereign Debt Crisis of 2010 and still evolving Emerging Markets Crisis of 2018. These large systemic crises were characterized by both global or regional destruction of human, physical, and financial capital. Systemic financial crises are characterized by an abrupt loss of liquidity, discontinuous market moves, extreme volatility, sharp changes in correlations and contagion across markets, and systemic instability. While the pathways of contagion of broad systemic and systemic financial risk are often well understood in retrospect, and the conditions for a systemic risk event may be well identified ahead of a crisis, the precise triggering event is rarely predicted.

The board is concerned about Global Risks and Trends and how they may impact Canada and specifically MPF and its portfolio of investments and liability obligations. The board of MPF has asked their CEO, Michael Abu, to identify the implications of world events in the context of potential adverse effects on MPF’s portfolio. Michael used the GRAFT process Application Wheel [2], shown on the following page in Figure 1 (download full article to view) to outline the nine steps that their organization went through with their management team to address the board’s concerns. This was an iterative process based upon the key learnings of the team.


Footnotes

See Appendix 2 for supporting research for 2030 scenarios.

[1] WEF 2008, pg 7, http://unpan1.un.org/intradoc/groups/public/documents/apcity/unpan034800.pdf

[2] Risks and Trends from WEF 2007 and 2017 ranking, adjusted for 2018 events.

[3] See Appendix 2 for supporting research for 2030 scenarios.

[4] https://www.mphonline.org/worst-pandemics-in-history/

[5] http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.857.5959&rep=rep1&type=pdf

[6] http://globalriskinstitute.org/publications/global-risks-trends-framework-graft-overview/

 


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icon of PDF file with down arrow  GRAFT-Back to the Future: 2007 - 2030