Global Risks 2014, Ninth Edition.

The Global Risks 2014 report highlights how global risks are not only interconnected but also have systemic impacts. To manage global risks effectively and build resilience to their impacts, better efforts are needed to understand, measure and foresee the evolution of interdependencies between risks, supplementing traditional risk-management tools with new concepts designed for uncertain environments. If global risks are not effectively addressed, their social, economic and political fallouts could be far-reaching, as exemplified by the continuing impacts of the financial crisis of 2007-2008

Counterparty Credit Limits: An Effective Tool for Mitigating Counterparty Risk?

A counterparty credit limit (CCL) is a limit imposed by a financial institution to cap its maximum possible exposure to a specified counterparty. Although CCLs are designed to help institutions mitigate counterparty risk by selective diversification of their exposures, their implementation restricts the liquidity that institutions can access in an otherwise centralized pool. We address the question of how this mechanism impacts trade prices and volatility, both empirically and via a new model of trading with CCLs. We find empirically that CCLs cause little impact on trade. However, our model highlights that in extreme situations, CCLs could serve to destabilize prices and thereby influence systemic risk

Managing Operational Risk in Payment, Clearing, and Settlement Systems

Awareness of operational risk has increased greatly in recent years, both at individual financial institutions and for payment, clearing, and settlement systems (PCSS). PCSS consist of networks of interconnected elements (i.e., central operators, participants, and settlement agents); operational problems at any one of the key elements have the potential to disrupt the system as a whole and negatively affect financial stability. The author describes the key features of systemically important PCSS in Canada and the oversight role of the Bank of Canada with respect to those systems. She also describes one approach that could be used to assess and manage operational risk in Canadian PCSS. This approach relies on a consistent definition of operational risk that can be applied across all elements of a PCSS. It uses a recent methodology adapted from the management of operational risk at individual financial institutions. This methodology, called the loss-distribution approach, assesses risk in terms of the potential outcomes of operational events owing to certain risk factors (such as systems problems, human error, process problems, and external events), their likelihood, and their frequency. Once operational risk databases are developed that record the frequency and severity of operational events, it will be possible to estimate parts of the loss distributions for PCSS. In the meantime, qualitative analysis provided by operations experts associated with the various elements of PCSS will be important for judging the potential impact and frequency of events. In a changing financial environment, it is hoped that this methodology could be used to supplement core aspects of operational risk management, such as sound corporate governance, internal controls, policies and procedures, knowledgeable people, and robust contingency plans.Financial institutions; Payments, clearing and settlements systems

Epistemic policy networks in the European Union’s CBRN risk mitigation policy

This paper offers insights into an innovative and currently flagship approach of the European Union (EU) to the mitigation of chemical, biological, radiological, and nuclear (CBRN) risks. Building on its long-time experience in the CBRN field, the EU has incorporated methods familiar to the students of international security governance: it is establishing regional networks of experts and expertise. CBRN Centers of Excellence, as they are officially called, aim to contribute to the security and safety culture in different parts of Africa, the Middle East, South East Asia, and South East Europe, in the broadly construed CBRN area. These regional networks represent a modern form of security cooperation, which can be conceptualized as an epistemic policy networks approach. It offers flexibility to the participating states, which have different incentives to get involved. At the same, however, the paper identifies potential limitations and challenges of epistemic policy networks in this form

Coordinating Local Adaptive Strategies through a Network-Based Approach

As the impacts of climate change become increasingly destructive and pervasive, climate adaptation has received greater political and academic attention. The traditional top-down model for mitigating climate change, however, is ill-suited to implementing effective adaptation strategies. Yet, local communities most impacted by climate change seldom have the tools and resources to develop effective adaptive strategies on their own. This note argues that a bottom-up, network-based approach could be a promising paradigm towards implementing effective adaptive strategies and empowering affected communities

Ranking the economic importance of countries and industries

In the current era of worldwide market interdependencies, the global financial village has become increasingly vulnerable to systemic collapse. The global financial crisis has highlighted the necessity of understanding and quantifying the interdependencies among the world’s economies; developing new, effective approaches for risk evaluation; and providing mitigating solutions. We present a methodological framework for quantifying interdependencies in the global market and for evaluating risk levels in the worldwide financial network. The resulting information will enable policy and decision makers to better measure, understand and maintain financial stability. We use this methodology to rank the economic importance of each industry and country according to the global damage that would result from its failure. Our quantitative results shed new light on China’s increasing economic dominance over other economies, including that of the United States, as well as the global economy