What are the biggest risks to global financial stability for the foreseeable future? How can businesses prepare? These were the questions asked at the ‘Insights into Instability: Preparing for the Next Financial Crisis’ event on Wednesday 17 July.

The Macquarie Business School event is part of a series of networking opportunities for current postgraduate students, alumni, and industry professionals.

Attendees heard from an esteemed panel of experts, including John Simon, Head of the Economics Research Department at the Reserve Bank of Australia; Wayne Byres, former Chair of the Australian Prudential Regulation Authority, and Non-Executive Director of Macquarie Bank and ASX Limited; and Elizabeth Sheedy, Director of the Young Australia Financial Diaries Project and Professor in the Department of Applied Finance at the Macquarie Business School.

Guided by the moderator, Professor John Romalis, Head of the Department of Economics at the Macquarie Business School, the discussion covered what is likely to cause the next financial crisis, the perception of risk in today’s dynamic business world, how the global economy would cope with instability in the financial market, and what resilience plans are in place at financial institutions.

Geopolitical events or cyber attacks likely sources of next crisis

The first question posed to the panel was the most obvious one for such a discussion: what are the biggest risks to global financial stability, given current regulatory frameworks?

The panel’s answer: the next financial crisis may stem from unexpected sources, such as geopolitical events, cyber attacks or a failure of a piece of financial infrastructure that affects liquidity of payments and transactions, rather than traditional financial risks.

“Periods of financial crisis and instability in the financial system tend to come from things that markets didn’t see coming or from issues the markets have trouble pricing,” said Wayne Byres.

“Perhaps unlike the global financial crisis and some crises that we’ve had in relatively recent times, I don’t think the next crisis will come from the traditional risks in the financial system because the financial system, particularly here in Australia, but in other parts of the world as well, is relatively robust at present.”

Wayne sighted the way the financial system has responded to a period of rapidly increasing interest rates as a sign of resilience and said despite losing an institution or two along the way, we have avoided major instability in the system.

“If I had to bet, the next bout of significant instability in the financial system is far more likely to come from the operation of the financial system rather than the traditional credit and market risks,” Wayne concluded.

Recent shocks have made people and institutions more risk-averse

Responding to a question about how easy it will be to bounce back from the next financial crisis, the panel discussed recent shocks to the market and how these have impacted the perception of risk among institutions and individuals.

“After covid, people have re-evaluated their approach to risk and the way they think about things, so broadly speaking I think the world is going to be much more cautious for an extended period of time,” said John Simon. “That means that we’re unlikely to have a crisis in the near future because of that inherent risk aversion at the moment.”

John warned, however, that this caution will likely fade over time.

“By the time we get to the next crisis everything will be forgotten and we will have moved on and be saying ‘this time is different’. So, when it happens, I think it’ll be just like it happened in the past – it is of course just a question of how long it takes to get there,” John said.

Wayne weighed in and reminded the audience that it all depends on the cause of the next financial crisis. He said, “If 2008 repeated, I'm quite sure we'd do better this time because Australia’s financial system is better capitalised, it’s got more liquidity, and it is more operationally resilient.”

The takeaway from this is that we are learning from each crisis, but there are always new risks to the market that will mean we need to constantly adapt to be resilient.

How would international coordination fair during a crisis?

The panel discussed various scenarios of a financial crisis and agreed that increased nationalism and the weakening of international institutions might complicate coordination between countries during a crisis.

“My concern is that in the new world that we’re in now, coordination might be more difficult because there’s more nationalism about. I see it as potentially being a lot harder next time around,” said Elizabeth Sheedy.

What can avoid or delay a global financial crisis?

Good governance, accountability, and a strong risk culture within financial institutions were mentioned as crucial to avoiding or delaying global financial instability.

Elizabeth also raised the importance of diversity on boards to help identify and address emerging risks.

“In terms of governance in Australia, I think we could still do better,” she said. “I don’t think there is enough genuine diversity. The focus is often on gender and ethnic diversity, which are obviously important, but I am talking about diversity in terms of thinking.”

Elizabeth elaborated, “Most boards are full of accountants and lawyers, and I don’t think there’s enough technology experts or directors that really understand complex technologies or some of the risks we have discussed around cyber threats, for example.”

As we navigate often turbulent waters, the discussion was well-placed to provide some hints and tips to future business leaders in the room. A big thank you to our esteemed panel of experts and attendees.

You can watch the event highlights below.

About the event series

This series of exclusive events will run throughout the year, with a focus on being a forum for ideas and networking for current postgraduate students, alumni and industry professionals. Each event spotlights an important business topic with commentary from high-calibre guest speakers and Macquarie Business School academics. We look forward to the next event in September.