Fueled by the ongoing Israel/Hamas and Russia/Ukraine conflicts, headline-grabbing geopolitical threats are a source of significant concern for financial institutions, which must consider their impact on energy prices, consumer and business confidence, market volatility, trade, and the supply chain. What steps can they take to measure and mitigate these unpredictable, idiosyncratic risks?

Geopolitical risks are broad, complex and hard to predict. Just consider, for example, the ramifications of the ongoing Russia/Ukraine military conflict in Ukraine, which has increased tensions between Russia and the West; the ongoing hostilities between Israel and Hamas, which has sparked violence and humanitarian crises in Gaza and the West Bank; and the escalating tensions between China and Taiwan, which have provoked military threats and sanctions.

Given the difficulty in accurately assessing both the likelihood and severity of an extreme tail event, how can risk managers deal with these challenges effectively? Let’s now take a closer look at geopolitical risks and consider the best approach for managing and mitigating these threats.