Geopolitical Risks on the Rise: Practical Advice for Banks

Geopolitical risk is becoming an increasingly urgent concern for banks, driven by the growing unpredictability of global events and their far-reaching consequences. In an interconnected world where political volatility, conflicts, and regulatory shifts are more frequent and intense, banks benefit from staying ahead of these challenges.  

This is not just a concern for large, multinational banks, either. Community banks are also vulnerable to the ripple effects of global instability. Even institutions that operate primarily on a local level can be impacted by geopolitical developments, particularly when their clients are tied to global supply chains or international markets.  

With this in mind, we asked two experts from global risk consultancy Control Risks to identify five key geopolitical issues that banks should closely monitor over the next 12 months. Their insights are crucial for understanding and mitigating the potential risks that could disrupt the financial sector in the year ahead.  

Cyber Espionage and Disruption  

As geopolitical tensions rise, particularly between the United States and China, U.S. banks face an increasing threat from cyberattacks and disruptive activities by state actors. Historically, these actors focused on surveillance and information gathering. However, experts warn that deteriorating relations have prompted a shift toward more disruptive cyber activities targeting the financial sector.  

Banks, of course, have grappled for decades with the complexities of cyber risks. “It’s extremely well documented that state actors are targeting critical sectors such as finance and technology, and many others in the U.S.,” said Barnaby Fletcher, who leads the risk analysis practice in the U.S. and Canada at Control Risks, which advises many financial institutions. “A number of state actors have been active for a very long time already.” But this broader shift in the landscape from espionage to disruption has severe implications, he said, including more brazen threat actors and increases in operational disruptions, financial losses, and reputational damage.  

To mitigate these risks, Fletcher said, banks should adopt a proactive and comprehensive approach to cybersecurity. One crucial aspect is addressing human error—falling for a phishing attempt, for example— which is a primary cause of cyber compromise. “The focus should be very much on training, as opposed to just looking at technical solutions,” he said.  

In addition, banks should monitor geopolitical indicators to anticipate shifts in the cyber threat landscape. This could include tracking changes in the state of U.S.-China relations or the evolution of the conflict in Ukraine. A noticeable increase in risk could require another “scaling up of cyber capabilities by the private sector,” Fletcher said.  

By being prepared and vigilant, banks can continue to navigate the complex and evolving landscape of cyber threats. “The best way you can manage a crisis is to have your contingency planning in place beforehand,” said Roberta Brzezinski, who manages Control Risks’ business intelligence team across the Americas and has more than two decades of principal private equity investment experience.   

Middle East Instability  

The Middle East offers lucrative opportunities and is a critical area of interest for many U.S. banks, thanks to significant investments and operations in countries like the UAE, Saudi Arabia, and other Gulf Cooperation Council (GCC) nations. But conflict and instability in the region, and the potential for escalation, is a significant concern. “If that region descends into war,” said Brzezinski, noting the unpredictability of the role of Iran, the fourth largest oil supplier in OPEC, “that’s going to have a significant effect on a bank’s investment decisions.”  

In light of these risks, Brzezinski suggests that banks adopt a cautious approach to their investments in the Middle East. One recommendation is to “review the timing of significant investments” in the region for the time being. This means being prudent about committing large amounts of capital until the geopolitical landscape stabilizes.  

“If I was running a bank, I would not be making massive expenditures in the region until 2025,” she said, "just to make sure that this doesn’t go sideways.”  

For existing investments, banks should have robust contingency plans in place. “You need access to information,” she said. “You need to be open to that information. You need to be open to the advice.” This involves continuously monitoring the situation and being prepared to act quickly if instability escalates.  

Moreover, banks should consider the impact of such instability on their clients and lending products—and explore ways to offer flexibility. “You don’t want to be tone deaf,” she said. “These things hit like a meteorite and cause huge ripples. Before equilibrium is restored, you don’t want to alienate your clients.” Proper planning will allow a bank to “ride out the storm” alongside its clients.  

South and Southeast Asia Political Volatility  

The political landscape in South and Southeast Asia poses significant challenges for U.S. banks. These regions are crucial to global supply chains, but they’re also increasingly prone to political instability—which can have far-reaching impacts on banks’ corporate clients and their financial stability.  

“Most of the world’s clothing is produced in Bangladesh,” Brzezinski said, noting the current political chaos there. “So whether it’s Bangladesh, Sri Lanka, Vietnam, Indonesia, these countries are a large and increasing part of the global supply chain. Political events in Asia are enormously significant.”  

Disruptions in these regions could impact banks if their customers face supply chain issues or financial difficulties, leading to loan defaults, reduced lending, and other financial challenges.  

Restrictive trade policies are also on the rise, further complicating the situation. “More and more governments are moving away from an ideal, if not a reality, of free markets lowering trade barriers, to very explicit industrial policy which is often protectionist,” Fletcher explained, noting that this trend is also taking place in China, the U.S., and the EU. Such policies can hinder international trade and investment, impacting banks that facilitate these activities.  

To address these risks, banks should closely monitor political developments in South and Southeast Asia. Staying informed about political changes and protectionist policies is crucial for anticipating potential disruptions.  

Yet again, proactive contingency planning is key. This includes developing strategies to support clients facing supply chain disruptions and incorporating flexibility in lending products to accommodate sudden changes in the business environment. Also, banks should manage concentration risk by avoiding overexposure to borrowers with significant ties to any single region or industry, reducing the potential impact of localized disruptions. 

Rising Environmental Activism  

Environmental activism is gaining momentum worldwide, with activists increasingly targeting financial institutions that fund fossil fuel projects. While this activism has traditionally been peaceful, there is growing concern that tactics may become more violent, posing significant risks to banks.  

Disruptions to bank operations, reputational damage, and potential legal or regulatory consequences are the key risks posed by increasing environmental activism. Banks could face physical attacks on their facilities or employees, as well as pressure campaigns and legal challenges related to their financing decisions. In addition, the activism surrounding these issues can make lending to companies in carbon-intensive industries or other sectors targeted by activists more risky, potentially leading to higher default rates and increased scrutiny of those business lines. 

Recent incidents indicate a shift toward more aggressive tactics. “We have seen over the last few years, groups using deliberately disruptive direct-action tactics,” Fletcher said. “There have been indications around the world, including in the U.S. with the Stop Cop City movement [in Atlanta], where there has been violence, arson, and injuries.” The potential for similar actions targeting banks, especially those involved in financing carbon-intensive industries, is a growing concern.  

Engagement is a key tactic for banks to consider. “Engaging with governments and trying to help them improve environmental regulations can be crucial,” Fletcher said. “Acknowledging that regulation of some form is probably coming in some areas, whether you like it or not.” By taking a proactive stance on environmental issues, banks can potentially reduce the intensity of activist targeting.  

Banks should also focus on communication and transparency regarding their own environmental policies. Clear communication about sustainability efforts and environmental commitments can help banks manage public perception and reduce the likelihood of being targeted by activists.  

Government Interference With Financial Regulators  

The potential for political interference with financial regulators and central bank independence should be of growing concern for U.S. banks, Brzezinski and Fletcher said. Political pressures and populist policies could undermine the stability and predictability of regulatory environments, impacting bank operations, profitability, and strategic planning.  

Independent regulators and central banks are crucial for maintaining economic stability and confidence in the financial system. Now, Fletcher said, “There is a possibility that governments, especially populist ones, may start looking at interest rates and thinking maybe the regulator doesn’t need to be so independent anymore.” Although this risk is currently low, he added, it is worth monitoring as political landscapes evolve.  

Interference with financial regulators could lead to unpredictable policy shifts, creating an unstable environment for banks. To navigate these potential changes—ranging from interest rates to compliance requirements—banks need to be prepared and proactive. “Every company in every sector, including the financial sector, is getting pulled into the politics,” Fletcher noted. He emphasized that it’s important for banks to “proactively engage” with government entities at all levels: “It doesn’t necessarily pay to hang back and just keep your head down anymore.”  

Banks should strengthen their risk management strategies to address potential political and regulatory shifts, Brzezinski emphasized. Incorporating political risk assessments into strategic planning allows banks to better anticipate and respond to changes, while strong internal controls and compliance programs ensure operational stability.  

She highlighted the importance of integrating risk assessment into every level of the organization: “Risk is an integral part of return. You can’t have return without risk.” She urged risk teams to work closely with leadership to ensure flexibility and preparedness, because “something’s always going to happen. It’s a volatile world out there.”