Extreme Risks: From Pandemics, to Currency Crises
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Transcript of Extreme Risks: From Pandemics, to Currency Crises
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Risk
kvfhaerhig Impact Low Very low Very, very low
Financial
High
MediumExcessiveleverage
Banking crisis
Low Insurance crisis
Economic
High Depression
Medium Currency crisis Sovereign default
Low
Political
High Climate change End of capitalism
Medium Political crisis Disunity in Europe Major war
Low Protectionism Killer pandemic
RiskLow Could be expected
once every 10 yearsfrom current conditions
Very low Could be expectedonce every 20 yearsfrom current conditions
Very, very low Could be expectedonce every 100 yearsfrom current conditions
Impact
High impact on most asset
and liability values
Medium Direct and materialimpact on some assetand liability values
Low Direct impact onfew values, variable
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Risk ranking* as at 30 June 2009
Rank Risk Description Possible hedge
**1 Depression
nominal bonds
2 Real assets, for example gold,
**3 Excessive leverage Debt burden cannot be serviced from income Gold, reserve-status currency
**4 Currency crisis Gold, foreign assets
**5 Banking crisis Balance sheets cannot absorb another shockNominal sovereign bonds (medium
duration)
6 Sovereign default Default by a developed country on its debt Country insurance (for example CDS)
7 Climate change Diversion of capital to mitigation uses No general hedge
8 Political crisis Rise in power of extremist groups No obvious hedge
**9 Insurance crisis Insolvency within insurance sectorNominal sovereign bonds (medium
10 Protectionism Reversal of movement towards free trade No general hedge
11 Disunity in Europe Break-up of the euro Long Germany (hedged)
12 End of capitalism Move to socialism and closing of markets Gold
13 Return to a gold standard Gold
14 War Long neutral countries
15 Killer pandemic Contagious disease with very high mortality
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Excessive leverage
Banking crisis H
Insurance crisis H M
Depression H H M
Currency crisis H H L H
Sovereign default H H M H M
L H L
L M L H
Protectionism L H M L
Political crisis M M H M H H L H
Disunity in Europe L H L H H H H H
End capitalism L M L L M L H
Climate change M
Killer pandemic L L
War L L L L H L H L
Lev Bank Ins Dep Ccy Def Hyp Fiat Prot Pol Eur End Clim Pan War
H High degree of association. Could be causality in both directions
M Medium degree of association. Could be causality in one direction
L Low degree of association. A possible contributing, rather than casual, factor
No, or very low, association
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