Acting to Avoid "Green Swan" Events: The Emergence of Climate-Related Risks

Cover Story

Acting to Avoid “Green Swan” Events: The Emergence of Climate-Related Risks

In the World Economic Forums’ (WEF) annual Global Risk Report, climate action failure has been one of the top five risks in terms of impact for eight years in a row. No wonder that the relevance of climate risks for the whole financial system is earning more visibility in the public discussion. The book “The green swan - Central banking and financial stability in the age of climate change” published by the Bank for International Settlements (BIS) has brought the term on the agenda. The challenge from their perspective is that existing climate-economic models cannot accurately and adequately anticipate climate-related risks. That is what the BIS calls a “green swan” risk: “potentially extremely financially disruptive events that could be behind the next systemic financial crisis”. 
While these risks can be perceived by top decision makers of the WEF, investment professionals will not be able to translate them in traditional risk measures due to the intangibility of this new emerging threat. Even if this seems surprising on a first look, it is easy to explain because physical and transition risks are linked to complex, long-term and nonlinear chain reaction effects. Without technical innovation or a change in behaviour, this could lead to irreversible movements that would make quantifying financial damages impossible. Concisely, the identification and management of climate-related risk, the long-term time horizon of these risks and the transformation of the (resilient) financial system are the main challenges. So, what needs to be done by the central banks?
 

Special Article

Hong Kong – Becoming an International Securitisation Hub

Under the two important strategies of Mainland China – the Belt and Road Initiative (BRI) and the Guangdong-Hong Kong-Macau Greater Bay Area (GBA) development, which emphasise the importance of infrastructure and small and medium enterprises (SMEs) as part of the local, regional and global economies, Hong Kong is presented with unprecedented opportunities of developing into a securitisation financing hub. By leveraging on its public resources and regulatory and tax systems, Hong Kong not only can use its unique position as a leading international financing hub to open up new securitisation markets to provide investment opportunities in infrastructure and SMEs to global institutional investors, but could in turn also bring an influx of additional capital markets funding into the Hong Kong market.

China World

The Opening Up of Asset Management for AICs
—    A Summary of the New Asset Management Business Notice

The China Banking and Insurance Regulatory Commission (CBIRC) has recently issued the “Notice on Matters Relating to Asset Management Business undertaken by Financial As¬set Investment Companies” (“the Notice”), which is an indication that further directives can be expected for the undertaking of asset management business by financial asset investment companies and regulators are ready to provide guidance and assistance in the development of market-oriented debt-to-equity swaps.


 

Fintech

Covid-19 Has Made Some Feel “Naked” Without Digital Transformation and AI

Covid-19 has changed consumer behaviour forever and the Hong Kong banking and financial services industry urgently need to cope and adapt. Digital transformation with AI has quickly become the top priority for those that do not want to be left behind by the new wave of digitalization. “Necessity is the mother of invention,” as the old English proverb goes. With the current Covid-19 pandemic, the struggle for business survival is truly the mother of innovation and digital transformation. Warren Buffet once said, “Only when the tide goes out do you discover who’s been swimming naked.” Many businesses suddenly find themselves quite “naked” without the use of physical sales and distribution channels, and the only way to connect with customers is digital. 

Knowledge Plus

The Other Pandemic: Cybercrime and Threat

The development of new technology and the internet has transformed how we do banking. People are now able to make payments and transfer money via the internet without physically going into a bank.  It also makes it easier to buy funds and stocks as this too can be done online at any time. Financial technologies such as big data, blockchain and artificial intelligence (AI) are changing traditional financial methods.

However, innovation has also created opportunities for cybercriminals and created risks for the financial industry. As criminologists like to say, “where there is money, there is crime.”  It is undoubtedly true that the financial industry has always been favoured by criminals as that is where the money is. The digitization of client data has also created new ways to rob banks involving data breaches and hacking.  In the digital world, data is currency. It has become the most valuable asset of the financial industry. “Where there’s data, there’s crime” is the new truth as financial industry databases are a lucrative target for cybercriminals. 
 

GRC Corner

Cultivating Sound Bank Culture in Hong Kong  

Over the years, bank “culture” has been a strong focus for banks and regulators globally. No longer seen as a nebulous and undefinable concept, bank culture carries concrete regulatory expectations tied to compliance and senior management engagement. 

In 2017, the Hong Kong Monetary Authority (HKMA) initiated bank culture reform, with banks given 12 months to meet expectations. Banks have since been asked to self-assess their progress. The results of those self-assessments indicate enhancements have been made to culture, but most banks are still at an early stage in the process.