‘European cooperation essential to confront geopolitical risks’

Why this study?

“For several years we have been witnessing significant shifts in the geopolitical landscape. Whereas free trade and international cooperation used to be the watchword, fragmentation and the formation of new blocs between countries are now increasingly common. So we asked ourselves: what kind of risks does this pose for banks, insurers and pension funds and, in turn, what does that mean for our supervisory activities?”

What does the study reveal?

“The study clearly shows that geopolitical tensions can be a real trigger for the risks financial institutions are exposed to. We are talking about financial risks, such as credit losses and stock market shocks if tensions rise somewhere in the world, but certainly non-financial risks as well. These risks lie in the increasingly complex digital landscape in which institutions operate, with the inherent threat of cyberattacks being particularly noteworthy.

It is imperative that institutions are thoroughly prepared for these eventualities and work on bolstering their cyber resilience. Last summer we saw just how vulnerable digital infrastructure can be when things went seriously wrong at cybersecurity firm CrowdStrike, resulting in the shutdown of airports and hospitals worldwide, among other negative impacts. While the root cause was a computer glitch and not a cyberattack, the episode does show how disruptive these kinds of incidents can be. We are talking about cross-border problems, which therefore require cross-border solutions. European cooperation is essential in this regard. This is why we applaud the European Digital Operational Resilience Act, which provides new legislation to make the financial sector more resilient.”

Are you saying that financial institutions underestimate these risks?

“Definitely not. Geopolitical risks are on the minds of all the financial institutions we spoke to. Our concern as a supervisory authority is that they must also incorporate these risks into their risk management. They can do so by using stress tests and scenario analyses, for instance. By simulating certain extreme scenarios, they can identify both potential consequences and their own vulnerabilities. They can then take pre-emptive measures and will be less likely to face surprises when certain risks actually materialise. It is also worth examining the chain of parties they work with, such as ICT providers. How well prepared are they for geopolitical risks? After all, the chain is only as strong as its weakest link.”

How does such a study come about?

“We started by engaging many different parties in dialogue. Financial institutions at home and abroad, for example, as well as government agencies and experts on geopolitical developments. We asked them to outline their view of the international playing field and the risks they see for financial institutions. We also wanted to know the potential consequences for depositors and pensioners, for example, and what role they see for us as a supervisory authority. Based on their input and our own additional research, we started writing. This resulted in the study we are publishing today.”

What about DNB itself? Are you prepared for these risks?

“We, too, must be very alert to what is happening in the world and how it can impact our work. We maintain ongoing dialogue with the government, other central banks and financial institutions about worldwide developments. When it comes to dealing with cyber risks, we apply the same standards to ourselves as we impose on the financial sector. This is part of our cyberstrategy. We also mount test attacks on our own IT systems to assess our cyber resilience and make improvements where necessary. Here, too, we seek cooperation at the European level so that we can learn from the experiences of others.”

Read here the study: Resilience in turbulent times