The Coronavirus (COVID-19) pandemic ranks as the greatest threat to global financial stability in 2021, according to a new survey published by The Depository Trust and Clearing Corporation (DTCC). Nearly one third (31%) of survey respondents cited the pandemic as the top risk, with two thirds (67%) citing it as a top 5 risk.
More specifically, when asked how the COVID-19 pandemic may affect financial stability going forward, 68% of respondents cited concerns that equity valuations are stretched, reflecting unrealistic expectations about the economy’s recovery. Nearly the same percentage of respondents (67%) 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.
“A united effort across organizations will continue to minimize the impact of risks, such as infectious disease, on critical business services and market stability. In fact, supporting strategies will be front and center for companies in the years to come to ensure effective funding and resources to properly prepare and respond to such events,” said DTCC managing director for Global Business Continuity & Resilience, in a statement. “The preparations that stemmed from the sector-wide pandemic exercise conducted in 2007 were helpful in maintaining stability, but the broad impact of this pandemic will affect not only the way we respond in the future but how we work, how we adapt our culture, and how we invest for the foreseeable future.”
A majority of respondents (55%) expect market volatility in 2021 to be substantially higher than historical averages. Similarly, 42% of respondents expect systemic risk and financial instability to be worse in 2021 than in 2020.
“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,” said Andrew Gray, group chief risk officer at DTCC, in a statement. “Despite these challenging conditions, financial market infrastructures around the world have proved resilient, demonstrating their crucial role in safeguarding financial stability.”
Other top risks
- Cyber risk: Cyber risk was cited as a top five risk by 54% of survey respondents, a decrease from 63% in last year’s survey. Several respondents commented that cyber-attacks are becoming increasingly sophisticated, adding that cyber risk is “always an underlying threat.” Numerous respondents also highlighted the growing prevalence of cyber risk due to increased remote working environments as a result of the pandemic.
- Geopolitical risks: Half of 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% of respondents this year.
- Global debt: The survey indicated growing concerns about the risk created by excessive global debt, with 33% of respondents citing this as a top 5 risk, up from 24% last year.
“Global debt levels, which were already elevated prior to the coronavirus outbreak, have increased due to a series of stimulus measures and monetary policy accommodations”, said Michael Leibrock, chief systemic risk officer at DTCC in a statement. “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.”