According to JP Morgan, one of its models that “calculates outcomes based on the length of the economic expansion, the potential duration of the next recession, the degree of leverage, asset-price valuations and the level of deregulation and financial innovation before the crisis” sees the next financial crisis occurring in 2020. We recognize this current economic expansion is long in the tooth, but to us what is more worrisome is how the next financial crisis might start. Several new reports point to cyber threats as the likely culprit. Perhaps companies will take heed of these findings and perspectives, which would serve as the latest catalyst for our Safety & Security investing theme.
On Wednesday, the Depository Trust & Clearing Corp., which provides clearing and settlement for the financial markets in the U.S., released a report, entitled “The Next Crisis will be Different: Opportunities to Continue Enhancing Financial Stability 10 Years After Lehman’s Insolvency.” It discusses several macroeconomic and market-related risks to the financial system but specifically said that cybersecurity threats “have grown to a point where they may have become the most important near-term threat to financial stability.”
Cyberthreats have consistently been ranked as the number one concern by respondents to Depository Trust’s Systemic Risk Barometer since the survey began in 2013: “The motivation of cyber-attackers is shifting from purely achieving financial gains to disrupting critical infrastructures, such as through nation-state attacks, which threatens the basis for confidence in the financial system and even national or international stability.”
They aren’t the only ones worried. After the financial crisis, the Dodd-Frank Act established the Financial Stability Oversight Council to identify and monitor excessive risks to the U.S. financial system. The chairman is the secretary of the Treasury.
The Office of Financial Research provide financial data and research to the council and each year publishes a Financial Stability Report on risks to the financial system.
The most recent report, published in December, came to the same conclusion as the Depository Trust: “A large-scale cyberattack or other cybersecurity incident could disrupt the operations of one or more financial companies and markets and spread through financial networks and operational connections to the entire system, threatening financial stability and the broader economy.”