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Adapting Geopolitical Risk Frameworks For Financial Services

Written by Alex Zerden, Founder, Capital Peak Strategies

27 June 2024 - Russia’s expanded invasion of Ukraine in February 2022 elevated geopolitical risk from a historically niche capability for large multinational companies to an essential function for all types of organisations, especially financial institutions operating across multiple jurisdictions. 

As a concept, geopolitical risk seeks to capture the impact of disparate but interrelated global political (i.e., non-financial) issues on financial institutions’ operations. However, such broad scoping has not prevented attempts at a definition, the most general of which includes political and geographic considerations . For instance, the European Central Bank defines geopolitical risk as “the threat, realisation and escalation of adverse events associated with wars, terrorism and tensions among states and political actors that affect the peaceful course of international relations” . 

While the specter of armed conflict and other violence informs geopolitical risk, this article takes a broader interpretation of geopolitical risk to also capture internal domestic political dynamics within, rather than just between, states. This is especially due to the potential volatility and uncertainty surrounding nearly half of the world’s population residing in countries with an election taking place in 2024 .

Such risks can no longer be viewed solely as “long-tail” or “black swan” events. Instead, they should be viewed as part of “permacrisis” and integrated into business as usual (BAU) operations and strategic planning in addition to crisis and contingency planning. 

Geopolitical risk for financial institutions can be understood in three parts: 

1) tailoring geopolitical risk for financial services, 
2) developing a common framework for diverse financial institutions to manage geopolitical risk, and 
3) summarising and continuously updating the regulatory approach to geopolitical risk. 

Financial considerations drive the need to manage geopolitical risk, as such scenarios 
inadvertently impact capital allocation. For instance, the International Monetary Fund (IMF) reported a decrease in cross-border capital allocation in light of geopolitical risks, due to reasons including financial restrictions that increase transaction costs, informational asymmetries, general mistrust and fear of expropriation .

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