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Citi GPS: Global Perspectives & Solutions
April 2021
Quantifying Systemic Risk Key Metrics of Impact
Now that we have learned how to identify systemic risks, the next stage in a comprehensive risk management program would be to try to assess the scale of their impact, in order to prioritize action and allocate capital to mitigation or prevention. Although we still don’t know what the full implications of the COVID-19 pandemic will be, it has already given us an insight into the tragic human and disastrous economic costs that can result from a systemic risk. We may be able to manage one systemic risk at a time, such as the current pandemic or the GFC, but many are on the horizon, and they are converging. If we consider the potential human lives and economic output at risk from not adequately addressing systemic risks and their connectivity, at the most extreme, one could argue everyone on the planet and global GDP is exposed or at risk. However, that doesn’t help to give a relative sense of scale of the issues, or of the avoided liability if we take action. The production of a consistent metric, or a set of key metrics, across all risks considered allows an organization to rank wildly different catastrophes, such as windstorms against wars, or volcanic eruptions against cyber ransomware attacks, in terms of their disruptive potential in order to better understand and set risk tolerance. To illustrate this, we can use the global economic metric GDP@Risk proposed by Cambridge Centre for Risk Studies to quantify and thus compare global economic losses that are the consequences of more than 20 types of threats from the Cambridge Global Risk Index (CGRI) shown in Figure 8. The CGRI provides a risk ranking of around 280 cities which are the economic powerhouses of the global economy and whose combined gross domestic product (GDP) make up over 40 percent of global GDP. For each city and each of the 22 specific risk types, CGRI calculates the average annualized economic loss — GDP@Risk — inflicted by that threat on that city. Shown in Figure 8, Cambridge ranks the 22 threats, each according to its total GDP@Risk across all cities in the Index.
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