'It is important to distinguish between risks and emerging risks.'

Regulatory change is a familiar risk, although the pace of change has increased since the financial crisis of 2008. It is part of the business of regulated banks or insurance companies to deal with the regulators. However, cyber security is an important emerging risk with which financial institutions (FIs) are not yet familiar because hackers are innovating. System failure is a familiar risk and all FIs have been investing heavily in information technology and other systems, so for them.

Two further emerging risks present significant challenges for FIs. The first is the end of low-level interest rates. This raises questions such as if and when we will return to normal and how orderly will that process will be.

The answers are unknown because jurisdictions such as the euro area, the US and Japan have never experienced six years of near-zero interests rates.

The second emerging risk is market liquidity, which is drying up in a number of markets, particularly regarding corporate bonds, but it is relevant across several different bond sectors. It is a significant concern because the notion of a resilient financial system depends critically on market liquidity. How can there be a safer more resilient system if transactions become more difficult?

This article was first published in StrategicRISK’s Financial Institutions Report, published in association with Zurich. To download a copy of the full report, click here