How Geopolitical Crises Could Pose a Financial Systemic Threat
By Donna Borak
Central banks’ highly accommodative monetary policies in recent years have heightened the possibility that a geopolitical crisis in the Ukraine and elsewhere could eventually pose a systemic threat, according to a new paper by Federal Financial Analytics. The paper argues that global policymakers have been understandably focused on the causes of the financial crisis in trying to anticipate new threats, but need to be more aware of the potential fallout from a different kind of calamity. “The Ukraine situation is a sobering reminder of how geopolitical events fought over issues like national borders, ethnic solidarity, and resource allocation can quickly explode into currency, commodity, and cross-border financial crises,” writes Karen Shaw Petrou, the managing partner of Federal Financial Analytics. “To date, none of these factors have been reflected in stress testing or all of the prudential standards imposed on big banks in the wake of the financial crisis because repairs are focused on the causes of the crisis, all of which were financial, not geopolitical.” She argues that global financial markets are more vulnerable than ever because of highly accommodative monetary policy from the U.S. and other central banks. Such policies, she says, have helped to distort investment patterns and encourage unusually large holdings in obligations subject to geopolitical risks and to counterparties with concentrated exposures.