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DTCC survey shows Covid-19 top risk to financial stability

By Sunniva Kolostyak

December 02, 2020

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The coronavirus pandemic is a top risk to global financial stability, according to a survey from the Depository Trust and Clearing Corporation (DTCC).

The DTCC’s Systemic Risk Barometer and 2021 Risk Forecast revealed that Covid-19 will continue to play a significant role in 2021, with 31 per cent of the surveyed believing it is the top risk to stability and 67 per cent believing it to be among the top five risks.
DTCC
The post-trade market infrastructure also asked respondents how the pandemic could affect financial stability, to which 68 per cent of respondents cited concerns that equity valuations are stretched, reflecting unrealistic expectations about the economy’s recovery.

Moreover, 67 per cent believe that fiscal stimulus measures, while effective at preventing a short-term economic collapse, may have unintended consequences that could prove disruptive to financial stability in the longer run.

Leibrock, Chief Systemic Risk Officer at DTCC, highlighted that these measures have come on top of the global debt levels which were already elevated prior to the coronavirus outbreak.

“While these actions successfully mitigated some of the pandemic’s short-term economic impact, the sustainability of the resulting high debt levels could present challenges in the future,” he said.

More than half (55 per cent) expect market volatility in 2021 to be substantially higher than historical averages, while 42 per cent of respondents expect systemic risk and financial instability to be worse in 2021 than in 2020.

Also commenting, Andrew Gray, Group Chief Risk Officer at DTCC, said: “It is safe to say that 2020 can be classified as a year that defied predictions. As the coronavirus spread around the world in March, we saw unprecedented volatility and trade volumes across nearly every asset class.”

“Despite these challenging conditions, financial market infrastructures around the world have proved resilient, demonstrating their crucial role in safeguarding financial stability.”

Cyber risk was cited as a top-five risk by 54 per cent of the DTCC’s respondents, a decrease from 63 per cent in last year’s survey. Several respondents commented that cyber-attacks are becoming increasingly sophisticated, adding that cyber risk is ‘always an underlying threat’. Respondents also highlighted the growing prevalence of cyber risk due to increased remote working environments.

Half of the survey respondents included the outcome of the US presidential election within their top five risks, highlighting that the election outcome is expected to directly impact trade, fiscal and monetary policies for the next few years. Geopolitical risks and trade tensions were cited as a top 5 risk by 45 per cent.

The DTCC survey also indicated growing concerns about the risk created by excessive global debt, with 33 per cent of respondents citing this as a top 5 risk, up from 24 per cent last year.

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