Macro shocks prompt reset in Apac risk management

Empirical evidence suggests the frequency and severity of macroeconomic shocks are increasing, driven by geopolitical tensions, climate change, global inflation and supply chain disruption. Financial institutions, therefore, require a stronger risk management framework than ever.

Here we explore how banks and other market participants in Asia-Pacific (Apac) are responding to this new era of heightened uncertainty. 

Global tariffs

One of the most significant macroeconomic events took place in April 2025, shortly after the US announced it would impose far-reaching trade tariffs on the rest of the world.

While the imposition of the tariffs had been widely anticipated, many financial institutions under-estimated the extent to which they would affect markets.

Risk managers were especially caught off guard by the fact that it wasn’t just the stock markets that came under pressure, but the bond markets as well.

Sam Ahmed, Deriv Asia X

Sam Ahmed, former group chief operating officer for financial markets at DBS and now managing director of Deriv Asia X, says that existing linear modelling at many Apac banks was ill-equipped to deal with this kind of ‘black swan’ event.

He says there were three orders of risk that risk managers needed to consider: that Donald Trump would win the 2024 US election, that the swingeing tariffs would lead to massive volatility and that, once this happened, US Treasuries would sell off.

“As far as Trump’s election victory is concerned, most institutions captured the first- and second-order risks. However, they missed the third: assuming the global impact of tariffs would trigger an equity selloff and a flight into US Treasuries. Instead, five- and 10-year Treasuries sold off as yields rose sharply, and we saw selective flows into emerging market assets – a rare occurrence during a market crisis,” says Ahmed.

Stress-testing

An over-reliance on historical data in stress tests meant that many banks failed to respond to the new tariffs in the way they should have done.

“We live in a world characterised by black swans and fat tails, where you can’t forecast future market movements based on historical value-at-risk and correlations. Banks need to change their linear models and introduce both randomness in event outcomes and multiple stochastic scenarios,” says Ahmed.

Monte Carlo stochastic modelling is a good way of doing this. While many large banks already use Monte Carlo techniques within their critical finance functions, Ahmed says that experience with the trade tariffs shock has persuaded many to review the risk they are capturing.

Stress-testing, however, can only take banks so far.

“You can perform lots of stress-testing. You can double-stress the book. You can market-stress the book. But you don’t know exactly what the next event is going to look like,” says the head of liquidity management at an Apac bank. “Everybody knew about the tariffs, but nobody knew about the numbers.”

This has been a perennial problem with stress-testing and is one of the reasons banks have been looking to update their models, introducing methods such as reverse stress-testing and macroprudential analysis.

David Allright, Bloomberg

“Collectively, these shocks underline the need for dynamic, real-time risk reporting that can apply a variety of data-driven stress tests to model-changing conditions and external events,” says David Allright, global head of sell-side risk product at Bloomberg.

Under pressure from regulators, banks have also been increasing the frequency with which they run stress tests – something that the head of liquidity management says is a positive.

Intraday liquidity

The increased prevalence of macroeconomic shocks is also causing many to wonder if their assets can be easily converted into cash in times of crisis.

This is an issue that has been simmering for a couple of years, ever since rising interest rates caused a run on Silicon Valley Bank (SVB) in the US. Its eventual collapse in March 2023 marked the third-biggest banking failure in US history.

The SVB failure contributed towards the overall stress and uncertainty in the banking system that ultimately brought down Credit Suisse.

Roland Ho, OCBC

“Sometimes a bank failure is not about solvency. It’s about logistics,” says Roland Ho, global head of asset-liability management at OCBC. “Banks need to be confident that they can easily convert what they consider HQLA [high quality liquid assets] into cash to meet their obligations, even on an intraday basis.”

This is an issue that is at the forefront of mind for many Apac regulators. At the end of August, the Monetary Authority of Singapore published new liquidity risk management guidelines, outlining more granular details of what the regulator expects.

“As the market adapts to heightened liquidity requirements, modelling real-time behavioural risk scenarios will be fundamental to strengthening overall risk management,” says Bloomberg’s Allright.

To strengthen its own liquidity management, OCBC has used blockchain technology to establish a new short-term US dollar funding mechanism with JP Morgan.

“Even before the US markets open, we are able to tap into dollar funding should the need arise,” says Ho. “This is important for our risk management – and for addressing any concerns that the regulators might have.”

Interest rate shocks

Sudden swings in interest rates have also changed how risk management units assess exposure, with many institutions now looking to shorten the duration of the assets they hold.

“If rates move up too sharply, then our asset valuation will take a hit,” says Ho. “To address this, we have calibrated the duration of our interest rate risk, while managing an increased notional amount that we have to take on.”

There are two sides to this. While rising interest rates might put pressure on asset valuations, they also provide a boost to net interest income.

“We look at the impact of interest rate changes across the different risk measurements. We manage everything holistically rather than look at things in isolation. This improves our overall risk profile,” adds Ho.

Interest rate shocks could also encourage more hold-to-collect accounting for fixed income assets.

“For some of the bonds we purchase, we apply Fair Value Through Other Comprehensive Income accounting. This still causes certain fair-value reserve changes that impacts the bank’s capital, namely Common Equity Tier 1. Applying hold-to-collect accounting will remove some of this volatility,” says Ho.

However, book-keeping must line up with how banks trade. Hold-to-collect accounting should only be used for those assets that are kept on the balance sheet, rather than sold, with the purpose of extracting regular cashflows from them.

Another danger for banks is that higher rates could encourage depositors to take their money elsewhere, leading to a funding squeeze. Regional banks in Japan, for instance, are particularly worried about this.

“Smaller regional banks are now facing an outflow of deposits to other banks with higher credit, or those that offer higher savings returns. This is a significant challenge for many institutions, who may need to find new investment opportunities,” says Tsuyoshi Oyama, chief executive officer of RAF Laboratory, a risk management consultancy based in Tokyo.

However, looking for higher-yielding investment opportunities can introduce more risk.

“Markets might be booming now, but they can easily turn around. It’s a risky situation,” says Oyama.

Structural shift

It’s not just short-term market uncertainty that banks are concerned about. They are also wondering whether recent macroeconomic shifts are symptomatic of a wider structural shift.

“We’re witnessing an important development where global financial markets are increasingly shaped by a fragmented geopolitical landscape. One secondary effect is a gradual decline in the use of the US dollar, not only as a reserve asset but also as a payment currency,” says Ahmed.

While some countries may be promoting the use of their own domestic currencies, the dollar has one very important thing in its favour: it is widely traded between investors that sit outside of the US market.

“I have not yet seen a situation in which CNH was traded, where China wasn’t either the buyer or the seller,” says the head of liquidity management quoted at the beginning of this article. “Cyclically, the dollar may be declining, but structurally I’m not so convinced. One has to ask: what is the economically viable alternative to the dollar? Right now, there isn’t one.”

Ashok Das, Deutsche Bank

Ashok Das, Deutsche Bank’s head of global emerging markets and fixed income and currencies trading for Asia, points out that there is no other market that can match the depth of the dollar: “People are not going to give up the dollar just because the geopolitical risk on the currency is more than it was in the past.”

However, he acknowledges there is a shift taking place, and this is something risk managers might have to start thinking about.

“Those that are exposed to US dollars definitely want to diversify or hedge that exposure a bit more. At the same time, corporates in certain countries want their invoices to be in their home country [currency]. It’s not a de-dollarisation, but we are going to see a lot more fragmentation in the markets,” says Das.

For Asia’s banks, the past months have offered some useful lessons in living with uncertainty. Each new shock – from tariffs to rate spikes – has exposed fresh weaknesses in old models and forced a rethink of how risk should be measured and managed.

It’s a reminder that risk can’t be contained, it can only be better understood. And, in a region as fast-moving and complex as Asia, that understanding may prove to be the most valuable asset of all. 

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