Revisiting Interconnectedness: Emerging Risks and the Global Financial System

By DTCC Connection Staff

We live in an interconnected global financial marketplace driven by technological transformation. As our industry continues to evolve, the risk landscape has changed rapidly, profoundly leading to dramatic shifts in the interconnected risk threat faced by businesses. Given the increasing complexity and interconnectedness of the global financial system, it is more important than ever to manage risks holistically.

Related: DTCC Systemic Risk Barometer Survey Identifies Potential Threats

We recently released Interconnectedness Revisited, a white paper highlighting emerging systemic risks that are associated with recent changes in how the global financial system is interconnected. In this paper, we highlight how the global interconnectedness risk landscape has changed rapidly and profoundly over the past few years, particularly across five areas: Cross-Border Exposures, Non-Bank Financial Intermediation Sector, Operational Exposures, Financial Technology, and Financial Market Infrastructures (FMIs).

Read the paper

Read below for a high-level summary of how systemic risks are impacted by the interconnectedness of these areas:

Cross-Border Exposures

  • Systemic Summary: The interconnectedness created by banks’ cross-border positions, while beneficial in many ways, provides a transmission mechanism that can propagate shocks across the global financial system.

Non-Bank Financial Intermediation Sector

  • Systemic Summary: Non-bank financial institutions, which include insurance firms, venture capitalists and currency exchanges, among others, are interconnected with banks through a series of direct and indirect links.

Operational Exposures

  • Systemic Summary: While financial interconnectedness was prioritized in the aftermath of the GFC, operational interconnectedness has been rising on the regulatory agenda because of the growing use of outsourcing and the increased importance of third and fourth parties.
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Financial Technology

  • Systemic Summary: The scope of fintech-related applications is extremely broad and encompasses a wide array of innovative technologies, business models and applications, from cloud computing to machine learning and artificial intelligence. As such, the impact of fintech on financial interconnectedness is a multi-faceted topic.

Financial Market Infrastructures (FMIs)

  • Systemic Summary: FMIs are interconnected with the financial ecosystem, which could provide channels for risk transmission.

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