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Supervising Banks Through Geopolitical Instability

Supervising Banks Through Geopolitical Instability

by Starling Insights

Starling Insights Editorial Board

Oct 24, 2024

Observations

In a keynote speech delivered at the European Systemic Risk Board conference last month, Claudia Buch, Chair of the Supervisory Board of the European Central Bank (ECB), discussed the challenges of supervising banks amid growing geopolitical instability.

"Heightened geopolitical risk is unlikely to dissipate over the nearer-term horizon," Buch said. "We need to prepare for a prolonged period of sustained geopolitical tensions, marked by high uncertainty and increased volatility." At the same time, memories of previous financial crises and their impact are fading, she lamented. And, further complicating matters, there is increased scrutiny of regulatory frameworks, which some see as obstacles to competitiveness.

Amid this backdrop, Buch offered three key points:

  • Geopolitical risks differ from traditional risks and require frameworks to manage both "known unknowns" and "unknown unknowns";
  • Cooperation between microprudential and macroprudential supervision is crucial to address these risks; and
  • As geopolitical risks evolve, international cooperation remains vital.

Geopolitical risks are unpredictable and arise from political events or international shifts, leaving them difficult to quantify, Buch emphasized. Operational risks, such as cyberattacks and infrastructure damage, are worsened by digitalization and malicious actors. Supervision plays a crucial role in improving understanding and addressing gaps in banks' risk management, she said.

"Hence, governance structures within banks need to address the highly uncertain nature of geopolitical risk," Buch urged. "Banks are expected to have a robust risk culture, one that adapts to the changing geopolitical landscape and integrates uncertainties into a holistic risk management strategy." She referenced the ECB's "Draft guide on governance and risk culture," issued in July, as a key part of its efforts in this direction.

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