Geopolitical risk management for Kiwi financial institutions

Peace and prosperity cannot be taken for granted, and the current global volatility is growing more complex, warns KPMG in a new publication, Managing Today’s Geopolitical Risks – A Financial Services Guide.

A common response to these risks is to prioritise domestic suppliers, to “onshore” or “friend shore” procurement – particularly in industries such as technology, energy and pharmaceuticals – which is contributing to inflationary pressures in many countries, the report says.

What does this mean for Aotearoa New Zealand?

Geographically distant but not immune

While New Zealand may be geographically distant from many global hotspots, our open and interconnected economy means we are not immune to the impact of the global events and challenges of the last few years. These impacts reverberate throughout the financial markets, exacerbated by the country's reliance on international wholesale markets. As a result, financial services organisations are compelled to enhance their measures for managing geopolitical risks more than ever before.

Keep it simple, and don’t reinvent the wheel

However, amidst this complexity, there is a silver lining. By adhering to fundamental risk management principles, financial services organisations can effectively navigate geopolitical risks. KPMG's globally recognised Financial Services experts have outlined principles tailored for managing geopolitical risk, aligning with the existing enterprise risk management practices familiar to financial services organisations.

These principles offer a structured approach to addressing the uncertainty and complexity associated with geopolitical risks:

• • Define geopolitical risk drivers and resulting scenarios: From a financial services perspective, geopolitical risks are not standalone risks but rather risk drivers that impact existing risk classes such as credit risk, liquidity risk, and operational risk, similar to ESG risks. KPMG's international experts have highlighted two key megatrends stemming from recent geopolitical uncertainty – global fragmentation and disruptive technologies – as crucial factors for identifying risk drivers and informing strategies to address geopolitical uncertainty.
  • Understand the impact: Understanding the impact of these scenarios on individual risk types is essential. This qualitative and quantitative exercise considers hazard potential, scope of impact, and potential actions to be taken. Unlike traditional risk classes, the focus with geopolitical risk drivers is to cultivate a proactive mindset and readiness to respond, nurturing adaptive thinking and decision-making to foster resilience to geopolitical risk.
  • Take a strategic approach: It is imperative for financial services organisations to develop a strategy to capitalise on opportunities presented by geopolitical uncertainty in tandem with a risk-based approach. Internationally, the prevalence of geopolitical playbooks is growing, providing a foundation for structured discussions guiding decision-making and strategy development to leverage these opportunities. It is crucial to possess the right expertise across geopolitical, economic, market, and industry environments to seamlessly integrate both strategy and risk management to take advantage of the opportunities presented.