Financial-system risk
The losses that test financial systems now begin outside them: in a flooded port, a failed grid, a cyber incident at a shared provider or a harvest lost to heat. The Global Risks Alliance (GRA) starts from transmission, the specific channels through which a physical, operational or technological shock becomes a financial one. This section examines those channels across all hazards, sector by sector, so that banks, insurers, investors and public finance authorities can see how a shock in the real economy could reach them.
- 01In briefThe short answer
- 02How risk movesFrom a shock in the real economy to the financial system
- 03Supervisory frameWho has already defined the channels
- 04MethodHazard, exposure, vulnerability, then the balance sheet
- 05Why it is systemicExposures are shared and concentrated
- 06Sector by sectorWhere each channel is examined
- 07Division of labourScience and finance, each in its place
GRA · Institution · service level R0
The short answer.
Financial-system risk, at GRA, is the study of transmission: the specific channels through which a physical, operational or technological shock, such as a flooded port, a failed grid or a cyber incident at a shared provider, becomes a financial one. The section examines those channels across all hazards, sector by sector.
A loan book under scenario families.
How physical and transition risk could reach a loan book under different scenarios. Illustrative design values.
From a shock in the real economy to the financial system.
| Shock | Insurance | Banking and credit | Investors and funds | Public finance |
|---|---|---|---|---|
| Climate and hazards | Catastrophe claims, reinsurance cost, withdrawal of cover | Collateral damage, borrower income loss, credit migration | Asset repricing, stranded assets, liquidity calls | Reconstruction spending, contingent liabilities, revenue loss |
| Cyber and operational | Cyber and business-interruption claims, accumulation across policies | Service outage, fraud loss, third-party concentration | Market disruption, custody and data dependencies | Disrupted payments and public services |
| Energy and infrastructure | Property and interruption losses at single points of failure | Project-loan stress, sector concentration | Infrastructure valuations, transition exposure | Liabilities linked to utilities, subsidy and recovery costs |
| Trade and supply chains | Marine, cargo and trade-credit losses | Working-capital stress, trade-finance exposure | Earnings shocks, correlated sector losses | Import prices, tax revenue, food and fuel subsidies |
| Health shocks | Life, health and event claims | Payment holidays, sector defaults | Demand and labour shocks across holdings | Health spending, social protection, debt service |
Channels describe mechanisms, not measured strengths or probabilities.
Who has already defined the channels.
GRA works inside definitions these bodies set. It adds the step most frameworks leave to each firm: tracing a named physical or operational shock to the exposures it touches.
| Body | Instrument | What it fixes for this section |
|---|---|---|
| Financial Stability Board | Roadmap for Addressing Financial Risks from Climate Change; nonbank leverage recommendations (July 2025) | The shared vocabulary for transmission: exposures, amplification through leverage and liquidity, and cross-border spillover |
| Basel Committee on Banking Supervision | Basel Framework; climate principles (2022); voluntary climate disclosure framework (June 2025) | How credit, market, liquidity and operational risk are measured on bank balance sheets, and that climate drivers enter through those existing categories |
| International Association of Insurance Supervisors | Insurance Core Principles, ComFrame and the Insurance Capital Standard (adopted December 2024) | How insured loss, reserving and investment risk are supervised, and the group capital measure for internationally active insurers |
| CPMI and IOSCO | Principles for Financial Market Infrastructures | The resilience expectations for payment, clearing and settlement systems that every other channel depends on |
| International Sustainability Standards Board | IFRS S1 and IFRS S2 | What reporting entities disclose about climate-related risks, including scenario analysis and, for financial institutions, financed emissions |
Hazard, exposure, vulnerability, then the balance sheet.
Every channel page in this section follows one chain. Hazard comes from the science: flood depth, wind speed, drought index or outage duration, with its return period and its source at Climate and Hazards. Exposure is the geolocated stock of assets, loans, policies or services in its path. Vulnerability turns intensity into damage or interruption. Only then does the financial step begin: which collateral, premium, claim, revenue or settlement flow changes, and for whom.
The chain is written down before any number is produced, so a reader can see which link is observed, which is modelled and which is assumed. Governance questions that the evidence raises, such as who should hold a residual loss, are taken to the Capital Nexus at GRF.
Exposures are shared and concentrated.
The same assets and providers
Banks, insurers, funds and sovereigns depend on the same assets, the same providers and the same models. A loss that looks contained in one institution can be correlated across many.
Losses arrive late
Hazards and outages reach balance sheets as defaults, claims, repricing and fiscal strain, often months after the event and through counterparties never assessed together.
Not yet in financial form
Scientific and engineering evidence rarely answers the questions a credit committee, an underwriter or a supervisor must ask.
Where each channel is examined.
- Institutions and markets: Banking and credit, Insurance and catastrophe, Payments and market infrastructure and Systemic stability.
- Hazards and dependencies: Climate and nature risk, Cyber and operational, AI and model risk and Geoeconomic and trade transmission.
- Integrity and consequences: Financial crime and fraud, Sovereign and fiscal exposures and Economic and social consequences.
Science and finance, each in its place.
The science behind each shock, its hazard models, dependency maps and uncertainty, comes from The Global Centre for Risk and Innovation (GCRI); see Global challenges. GRA's contribution is the financial reading of that evidence, used in finance readiness. GRA issues no ratings, forecasts of loss or investment views on any of these risks. The institution's purpose is set out on The Global Risks Alliance home.
Terms used on this page.
Each term as this page uses it. Where a standard-setting body defines the term, the wording follows that body.
| Term | Definition |
|---|---|
| Transmission channel | The route by which a shock reaches financial institutions' balance sheets. |
| Common exposure | Holdings of the same or similar assets by several institutions, which makes their losses move together. |
| Systemic risk | The risk of disruption to financial services caused by impairment of all or parts of the financial system, with serious consequences for the real economy, as the IMF, FSB and BIS define it. |
| Second-round effects | Feedback from bank losses to the economy, such as tighter credit deepening a downturn. |
Where this page's references lead.
The bodies and documents this page is read against. Status and editions change; each link goes to the issuing body.
- FSB Roadmap for Addressing Financial Risks from Climate Change and progress reports
- Basel Framework (consolidated standards)
- IAIS Insurance Core Principles and ComFrame, including the Insurance Capital Standard (adopted December 2024)
- CPMI-IOSCO Principles for Financial Market Infrastructures (2012) and cyber resilience guidance (2016)
- IFRS S1 and IFRS S2 (ISSB), with the December 2025 targeted amendments to IFRS S2 GHG requirements (effective 2027)
Pages in Financial-system risk.
Systemic stability
PageBanking and credit
PageInsurance and catastrophe
PageSovereign and fiscal exposures
PageClimate and nature risk
PageCyber and operational
PageAI and model risk
PageGeoeconomic and trade transmission
PagePayments and market infrastructure
PageFinancial crime and fraud
PageEconomic and social consequences
Questions and answers.
What does all-hazards mean here?
Are the channels in the table measured?
Does GRA publish risk scores or rankings?
Around GRA.
Start with an enquiry.
The current service level is R0: information and enquiries. An enquiry receives a reference and names the next step; applications, payments, compute allocations and registrations open only when their team, terms and review capacity exist.