Systemic risk dominated the agenda at the Davos meeting of world leaders in Switzerland, held in what the World Economic Forum’s associate director Richard Elliott called “the long shadow of the financial crisis”.
Lloyd’s chairman Lord Levene shared a platform at the meeting with Barney Frank, chairman of the House Financial Services Committee, Jacob A. Frenkel, chairman of JP Chase Morgan International, Anand G. Mahindra, managing director of Mahindra & Mahindra, Kenneth Rogoff, Harvard economics professor and Zhu Min, deputy governor of the People’s Bank of China.
Assembled to discuss the implications of the global crisis, the panel debated the fall-out from the financial crisis and the possible causes of the next.
Lord Levene called for internationally coordinated regulation rather than unilateral or blanket regulation. “But the answer has to rest with industry. The financial services industry has to sort itself out because that’s the best way to recovery,” he told the panel.
The financial crisis highlighted the real importance of businesses understanding and managing the risks they take on, said Lord Levene who also led a discussion at Davos on ways to improve risk management in the financial services sector.
A rethink on managing global risk is needed
Both financial and non-financial corporations have plenty to think about. Fiscal crisis and unemployment, underinvestment in infrastructure and chronic disease are the main pivotal areas of risk over the coming years, according the World Economic Forum (WEF), which hosts the Davos meeting.
The authors of the WEF’s Global Risks 2010 report argue that recent events have revealed a fundamental need to change thinking on global risks and how they are managed. The report also highlights the heightened interconnectedness between the risks, shown in its Risks Interconnection Map www.weforum.org/globalrisks.
“The financial crisis and the ensuing recession have created a more vulnerable environment where unaddressed risks may become tomorrow’s crises,” Robert Greenhill, managing director at the WEF, warned. “The creeping risks that can be put off often have the biggest effect.”
Daniel Hoffman, chief economist of Zurich Financial Services said that an asset price collapse was still the strongest risk on the severity and likelihood axis. He also has concerns “abound” about the decline in the dollar and low interest rates fuelling another bubble.
Hoffman, who helped put the report together, added that many countries are at risk of over extending unsustainable levels of debt, possibly leading to a fully fledged sovereign debt crisis. “Governments, including in the US and UK need to take a reality check,” he advised.
Massive infrastructure underspend
Another contributor, Swiss Re’s chief risk officer Raj Singh pointed to a massive underspending in infrastructure, citing the World Bank estimate that $35 trillion is required over the next 20 years. “This is particularly acute for agriculture and food security… and billions of dollars need to be spent on water provision, energy supply, transport and climate change adaptation measures,” he added.
Singh suggested that governments ought to create “Country Risk Officers” to manage such risks and to coordinate solutions.
Linked to underinvestment in infrastructure, the risks associated with chronic diseases are also growing. Although the worldwide spread of H1N1 has dominated the headlines, the rise of non-communicable diseases such as heart disease, diabetes and preventable cancers is leading to what WEF calls “a silent pandemic”.
Other “creeping risks” that the WEF says should be kept on the radar include transnational crime and corruption, biodiversity loss and critical information systems or cyber risk.
Sheana Tambourgi, editor of the report and head of the Global Risk Network at the WEF, stressed the need for global decision makers to cooperate on managing global risks and added a warning to business leaders on the crucial importance of risk management: “Simply reverting to business as usual could have serious implications in the longterm in several risk areas.”
Lord Levene is at the World Economic Forum in Davos this week.
The theme for this year's Forum is "Improve the State of the World: Rethink, Redesign, Rebuild" and Lord Levene will be chairing a session of the Financial Governor's group on "Rethinking Risk Management in Financial Services" focusing on "Governance and Culture".
He will also be speaking to the media about regulation, the banking sector and coming out of the financial crisis. Click on the links below to watch the Chairman's interviews.
CNBC - 27 January 2010 (10MB, wmv)
