Geopolitical Risk

The GARP Benchmarking Initiative (GBI)® recently invited Financial Risk Managers (FRM®) globally to participate in a survey designed to understand the perceived:

• Sources of geopolitical risk
• Impact of geopolitical risk on traditional risk measures
• Preparedness of firms to manage geopolitical risks

In March, over 500 risk practitioners responded to the survey from a broad range of financial service firms and risk disciplines around the world. Roughly 57% of respondents work at large firms (over 1,000 employees) with more than 73% reporting at least five years of risk management experience.

Read on for key insights derived from the survey results.

Insight #1 – Firms are most exposed to geopolitical risks relating to China and to Russia’s war in Ukraine

European respondents are most exposed to the Ukraine-Russia war, whereas other regions are most exposed to US-China strategic competition.

Insight #2 – Firms anticipate increasing exposure to geopolitical risks relating to China and the Middle East in the coming year

US-China strategic competition and China-Taiwan tensions were the most commonly cited geopolitical risk exposures respondents expect to see increase over the next 12 months.

Insight #3 – Respondents most use resiliency planning and sovereign exposure limits to manage yet-to-be-identified geopolitical risks

Resiliency planning and sovereign exposure limits were the most common strategies employed to protect against yet-to-be-identified geopolitical risks, far outpacing insurance products or CDS instruments.

Insight #4 – Respondents found market risk and supply chain risk to be the most impacted and most difficult to manage due to geopolitical tensions

Insight #5 – Most respondents have not yet seen a significant increase in costs due to geopolitical risk

Respondents reported that the impact of geopolitical tensions and risk has so far had a greater impact on client/investor risk aversion and firm cost of capital than on operational or compliance costs.

Insight #6 – Firms have generally been more prepared for geopolitical risks relating to China than those relating to other regions

While a majority of respondents reported that their firms were generally or very well prepared to handle the geopolitical risk from US-China strategic competition, less than half reported the same level of preparedness for other sources of geopolitical risk, including only a third reporting that level of preparedness for attacks on shipping in the Middle East.

Insight #7 – Supply chain risk has been the area firms were least prepared to manage

While over 70% of respondents reported that their firms were generally or very well prepared to handle the market risk repercussions from the current geopolitical risk environment, less than half reported a similar level of preparedness to handle supply chain risk.

Insight #8 – Less than 40% of respondents’ firms’ scenario analysis and stress testing anticipated the current geopolitical risks generally or very well

Insight #9 – Respondents expressed greatest concern for commodity and stock market volatility and for cyber risk, over the next 12-18 months

Survey Demographics

Over 500 FRM-Certified professionals participated in this survey. They represent a broad swath of financial services firms and risk disciplines across the globe as shown in the respondent breakdowns by region, firm type, and primary risk area in the charts below.