Non Financial Risks are Emerging as an Extremely Serious Threat
In the recent past, most notably during the financial crisis of 2007/8, financial institutions of all sizes around the globe suffered material, sometimes catastrophic unexpected losses. These were invariably due to their inability to effectively identify, quantify, aggregate and report their internal exposures to non-financial risks. In many instances, the result was extreme accumulations of unidentified and unreported exposures to non-financial risks that eventually turned into losses. In contrast, external exposures to financial risks have intrinsic monetary value that can be readily identified and quantified in natural currency, aggregated and reported.
In short, a financial institution’s amount of exposure to external financial risks is typically known whereas its amount of exposure to internal non-financial risks is typically unknown.