Risk & Resilience

There is a moment that repeats itself across countless science-fiction stories. A ship’s sensors detect something unusual. Signals arrive that do not quite align with expectations. Perhaps it is a gravitational anomaly, a sudden communications blackout, or an unexpected hostile vessel appearing where none should exist. The bridge crew does not simply stare at the blinking lights. They interpret them. The captain asks the science officer what the signals mean, the engineer considers how the ship might respond, and the tactical officer evaluates defensive posture. Information becomes interpretation, interpretation becomes decision, and decision becomes action . . . capability.

A new risk monitoring report from the European Securities and Markets Authority suggests that despite resilient market performance in the latter half of last year, the conditions that could trigger market stress have not disappeared. If anything, they are becoming more complex.

The Prudential Regulation Authority has fined UK Insurance Limited £10.625 million after errors in the insurer’s Solvency II balance sheet caused it to overstate its solvency position in regulatory reporting and market disclosures.

The Securities and Exchange Commission has fined the New York Stock Exchange $9 million after a systems failure caused widespread disruption when markets opened in January 2023, skipping the opening auction process for thousands of stocks and triggering volatility across the market.

Separating how often from how bad gives the future shape, and for a lot of decisions, that shape is enough. The problem is that both frequency and magnitude are uncertain, and human intuition can strain when asked to hold too many combinations of uncertain factors at once.

The Central Bank of the United Arab Emirates has sought to reassure markets that the country’s banking and financial sector remains resilient and fully operational, even as geopolitical tensions across the region have intensified.

In my recent LinkedIn post, I argued that risk appetite is the most profound and important principle in risk management, and yet, in practice, it often results in the most shallow and trivial application. The more I reflect on it, the more this paradox seems to explain many of the shortcomings we see in modern risk frameworks.