Geopolitical risk refers to the potential for adverse events arising from international tension, such as trade restrictions, cyber attacks and conflicts. This box examines the potential impacts of geopolitical risk on financial stability in New Zealand. We also outline the actions we have taken to support financial system resilience to geopolitical risks.
Over the past decade, geopolitics has featured more prominently in the risk assessment and surveys undertaken by financial regulators. In part, this reflects Russia’s invasion of Ukraine, US-China tension and conflicts in the Middle East.
Geopolitical shocks transmit to the financial system through two main channels. Shocks can impact on trade and create uncertainty, for example through supply chain disruption and reduced access to export markets. Shocks can also transmit through the financial market channel, for example by tightening funding conditions and reducing asset prices. These effects can impact financial institutions through higher defaults, funding costs or market risk, depending on the transmission and severity of the shock.
Figure A.1: Transmission of geopolitical risk to financial stability
