The Global Risks Alliance (GRA)
Shocks to the real economy and vulnerabilities inside the financial system reach capital markets through identifiable channels: repricing, liquidity and funding, leverage and margin, common exposures and infrastructure. This page shows how those channels work, how they interact and how stress can travel onwards from markets to banks, funds, insurers, governments and the real economy. Most episodes involve several channels at once.
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Risk transmission in Capital Markets Nexus is the path by which physical, transition, technology and systemic shocks reach the sector and travel onward through balance sheets, markets and the real economy. Analysis uses aggregated, sector-level indicators such as bid-ask spread on benchmark securities and option-adjusted credit spread by rating band; it assesses no individual firm and is not investment advice.
Fig.How GCRI, GRF and GRA share one field while the authorities decide. Design, not a record.
The working screen behind this subject: its structure, terms and states. Names are placeholders and values illustrative.
Changes in expected cash flows or risk premia, from earnings, policy, geopolitics or climate, revalue securities across markets.
Dealers' balance sheets and funding markets determine whether trades can be absorbed. See Market liquidity.
Margin calls and leverage limits can force sales into falling markets, amplifying moves.
Bond markets transmit physical shocks through issuers' revenues and assets and through sovereign balance sheets. Mapping issuers' located assets and countries' hazard exposure beside their outstanding debt shows which segments of a bond index are exposed to the same event. Design index only, not a rating. Sovereign channels continue at Sovereign Capital Nexus; foresight on geopolitical shocks at GRF geopolitical futures.
Central clearing reduces bilateral counterparty risk and concentrates it at central counterparties. A CCP's default waterfall, margin model and recovery tools decide how a member default is absorbed. The CPMI-IOSCO principles set the standards; FSB guidance covers CCP resolution. Topic depth at clearing and settlement.
Many investors holding similar assets or following similar strategies sell at the same time. See Market concentration.
Falling asset values reduce collateral, prompting more margin calls and sales.
Funds offering daily redemption while holding less liquid assets can face run dynamics.
Operational problems or margin procyclicality at central counterparties transmit stress to members. See Clearing and settlement.
Poor or delayed data increase uncertainty and widen spreads. See Market data quality.
Stress in capital markets reaches banks through securities holdings and funding costs, insurers and pension funds through asset values and collateral needs, governments through borrowing costs, and the real economy through the cost and availability of finance. System-wide effects are studied in Financial Stability, and governance dialogue is convened by Capital Nexus at The Global Risks Forum (GRF). A Nexus Universe theme for this field is market liquidity under geopolitical shock; see test in Nexus Universe.
Transmission analysis uses aggregated data and published research. It does not assess individual firms, recommend transactions or constitute investment advice. Methods draw on network science and contagion and econometrics, and scenarios carry their assumptions.
Any discussion among firms takes place under GRA's competition safeguards, set out in a written competition policy that counsel reviews before membership opens: no exchange of prices, positions, client terms or strategies, and data from firms only in aggregated form.
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. |
| Contagion | Transmission of losses or stress from one institution or market to others. |
| Second-round effects | Feedback from bank losses to the economy, such as tighter credit deepening a downturn. |
| Common exposure | Holdings of the same or similar assets by several institutions, which makes their losses move together. |
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