Building Resilience in Financial Systems

Inside (the) Money Machine: Modeling Liquidity, Maturity and Credit Transformations | prepared by International Monetary Fund This report, authored by Shalva Mkhatrishvili, rigorously investigates the mechanisms of #liquidity, maturity, and #credit transformation within #modernfinancialsystems. Its central objective is to elucidate how intermediaries—through maturity mismatches, leverage, and liquidity provisioning—propagate shocks and influence systemic stability. By integrating macro-financial theory with quantitative modeling, the study seeks to provide regulators, central banks, and institutional investors with actionable insights on mitigating fragility while preserving market efficiency and profitability. The study develops a comprehensive framework combining dynamic #balancesheetmodeling, network analysis of interbank exposures, and stress scenario simulations. Key findings indicate that a 12% contraction in short-term funding can amplify systemic liquidity gaps by 18%, while highly leveraged intermediaries exacerbate downstream credit tightening by 10–15%. Institutions maintaining higher liquidity-to-asset ratios demonstrate a 22% increase in resilience under stressed conditions, although #ROI experiences a modest decline of 1.7 percentage points. Moreover, the study quantifies the benefits of diversified maturity structures, showing a 2–3% enhancement in risk-adjusted #ROE and improved #efficiencymetrics across the #banking network. Analysis underscores the critical trade-offs between profitability and stability. Liquidity and credit transformations, if unmanaged, generate elevated risk concentrations and reduce network resilience by up to 25%. Risk-reward evaluations reveal that optimizing maturity ladders and liquidity buffers allows institutions to sustain ROE while mitigating the probability of systemic contagion. Efficiency analyses further demonstrate that proactive management strategies can enhance operational robustness by 15–20%, offering a measurable improvement in both firm-level and system-wide financial performance. In conclusion, this report provides a foundational framework linking micro-level financial engineering with macro-level stability outcomes. By integrating liquidity, maturity, and credit dynamics into stress-tested models, it demonstrates how measured interventions optimize ROI, reinforce ROE, and strengthen systemic resilience. The insights equip policymakers and financial institutions with a quantitative roadmap for balancing profitability imperatives with the overarching objective of maintaining global financial stability.

Banks today must operate in an environment of ever‐increasing uncertainty, where extreme events—from cyberattacks and natural disasters to geopolitical shocks—can abruptly disrupt critical supply chains. In the digital age, resilient supply chain risk management is essential not only for maintaining operational continuity but also for protecting the financial ecosystem that supports banks’ services. 1). A comprehensive approach begins with a holistic risk assessment that extends beyond internal systems to encompass all third‐party vendors, technology providers, data centers, and logistics partners. 2). By deploying advanced analytics and artificial intelligence, banks can map their entire supply chain in real time, identify vulnerabilities early, and trigger mitigation strategies to prevent interruptions before they escalate. 3). Diversification is fundamental. Banks are increasingly reducing dependence on any single supplier or geographic region by establishing multiple sources for key products and services. This multi-layered diversification minimizes the risk of disruption if one source fails, ensuring continuity of operations. 4). Equally critical is digital integration: modern technologies such as the Internet of Things, blockchain, and cloud-based platforms provide end-to-end visibility across the supply chain. 5). Continuous monitoring and automated alerts enable banks to rapidly respond to potential problems with flexibility and precision. 6). Robust cybersecurity is also imperative, as digital supply chains are prime targets for increasingly sophisticated cyberattacks. Banks must enforce stringent cybersecurity protocols not only within their own systems but also throughout their vendor networks. 7). Regular audits, compliance with standards like ISO 27001 and the NIST framework, and information sharing with trusted partners help fortify the entire ecosystem against intrusions. 8). Strategic partnerships further strengthen resilience. Collaborative relationships with vendors and technology providers allow banks to jointly develop risk management frameworks, share best practices, and coordinate emergency response plans. 9). Regular scenario planning and stress testing—simulating extreme events like coordinated cyberattacks or supply chain disruptions—ensure that contingency measures are current and actionable. 10). A culture of continuous improvement is vital: post-event reviews, feedback loops, and iterative updates to risk management strategies enable banks to learn from past disruptions and adapt to emerging threats. By integrating these principles—comprehensive risk mapping, diversification, digital integration, robust cybersecurity, strategic partnerships, agile scenario planning, and continuous learning—banks enhance their supply chain resilience and better navigate extreme events in today’s dynamic digital landscape, thereby protecting their operations, customer trust, and overall financial stability.

Every time I’ve seen a startup close a new round, the same thing happens: a major existential challenge shows up right after. Here's how to build resilience before the next crisis hits: ▶️ Build your decision-making muscle now. Observe how you make hard calls on smaller issues so you're ready when the big ones come. Document your decision-making process - you'll need to move fast when stakes are high. ▶️ Create financial runway buffers. Always assume you'll need 6 months longer than projected to hit your next milestone. Build this cushion into your fundraising targets and burn rate planning. When that unexpected pivot comes, you'll have breathing room instead of a missed deadline. ▶️ Strengthen your board relationships before you need them. Schedule informal check-ins with investors between board meetings. Share challenges early and often. When a crisis hits, you want advisors who already understand your business deeply, not people you're briefing for the first time. ▶️ Document your core assumptions. Write down what you believe about your market, product, and business model. Review these monthly. When disruption forces a strategy shift, you'll know exactly which assumptions broke and can pivot with clarity instead of chaos. From seed to IPO, every phase brings its own adrenaline spike from fighting off the next challenge. It’s easy to believe that once you hit that next milestone, things will finally smooth out. But in startups, those spikes are the norm - not the exception. Don’t waste energy hoping for calm; use that energy to build the systems and mindset that help you ride the spikes better when they come. Because they always do.

Balance Sheet Optimisation: A Prudent Approach to Sustainable Growth Banks operate in a highly regulated and competitive environment, where balance sheet optimisation is essential for long-term sustainability. Striking the right balance between liquidity, profitability, and risk requires a structured and strategic approach. Balance sheet optimisation involves managing assets, liabilities, and capital efficiently to enhance returns while maintaining regulatory compliance and financial stability. It requires an in-depth understanding of key metrics such as the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) to ensure liquidity resilience, Risk-Weighted Assets (RWA) to manage capital efficiency, and Net Interest Margin (NIM) to maximise profitability. Effective duration and basis risk management also play a critical role in mitigating interest rate risk. A well-optimised balance sheet delivers benefits beyond regulatory compliance. It strengthens financial stability, enhances shareholder value, and enables institutions to navigate economic cycles with greater resilience. However, achieving this requires careful consideration of several key factors. Liquidity management remains a priority, as maintaining an adequate liquidity buffer is essential for financial resilience. Banks need to align funding sources with asset maturities, optimise their high-quality liquid asset (HQLA) portfolios, and conduct stress tests to assess potential liquidity risks. At the same time, holding excessive liquidity can reduce profitability, making it crucial to find an optimal balance. Capital efficiency is another important consideration. By effectively managing RWAs, banks can allocate capital to areas that generate the highest risk-adjusted returns. Strategies such as optimising credit exposures, diversifying assets, and implementing capital-light business models can enhance return on equity (ROE) without breaching regulatory constraints. Interest rate risk and market risk also require close attention. Effective asset-liability management (ALM) strategies help banks navigate interest rate volatility, ensuring that duration mismatches do not erode profitability. Hedging strategies, dynamic repricing approaches, and robust risk modelling contribute to stronger interest rate risk management. Diversification of funding sources is essential to reduce refinancing risk and enhance stability. Over-reliance on a single funding channel can expose banks to disruptions, while a well-diversified funding structure—including retail deposits, wholesale funding, and capital market instruments—improves resilience. Credit risk optimisation plays a crucial role in enhancing risk-adjusted returns. Banks that refine risk-based pricing, improve borrower selection, and implement effective portfolio diversification strategies can strengthen credit risk management while maintaining growth potential.

🏦 𝗛𝗶𝗴𝗵 𝗘𝗰𝗼𝗻𝗼𝗺𝗶𝗰 𝗨𝗻𝗰𝗲𝗿𝘁𝗮𝗶𝗻𝘁𝘆 𝗠𝗮𝘆 𝗧𝗵𝗿𝗲𝗮𝘁𝗲𝗻 𝗚𝗹𝗼𝗯𝗮𝗹 𝗙𝗶𝗻𝗮𝗻𝗰𝗶𝗮𝗹 𝗦𝘁𝗮𝗯𝗶𝗹𝗶𝘁𝘆 Global economic uncertainty has been amplified by a confluence of factors, including the COVID-19 pandemic, inflation shocks, escalating geopolitical tensions, rapid technological advancements, and climate-related disasters. According to the recent International Monetary Fund report, high macroeconomic uncertainty can significantly raise downside risks for economic and financial stability, and the relationship may be stronger when macrofinancial vulnerabilities are elevated, or financial market volatility is low. Uncertainty is not as easily measured as traditional indicators like growth or inflation, but economists have built some reliable proxies. ►►To reduce domestic macroeconomic uncertainty and its adverse implications for macrofinancial stability, policymakers are recommended to build credible policy frameworks and improved communication strategies. They are also advised to build resilience against macrofinancial vulnerabilities, particularly when macroeconomic uncertainty is high. The following 𝗽𝗼𝗹𝗶𝗰𝘆 𝗿𝗲𝗰𝗼𝗺𝗺𝗲𝗻𝗱𝗮𝘁𝗶𝗼𝗻𝘀 are highlighted in the report to mitigate the risk:  ►Reducing domestic macroeconomic uncertainty by strengthening the credibility and transparency of frameworks for monetary, fiscal, and financial sector policies and through effective communication strategies. ►Implementing adequate fiscal and macroprudential policies to contain macrofinancial vulnerabilities and build resilience against adverse shocks, particularly when macroeconomic uncertainty is high. ►Building adequate international reserve buffers and allowing exchange rate flexibility to help cushion the adverse spillover effects of an increase in foreign macroeconomic uncertainty. ►Devoting resources to quantifying, managing, and mitigating the risks from rising geopolitical uncertainty on macrofinancial stability. Read more below. Chapter authors: Rafael Barbosa, Yuhua Cai, Mario Catalán (co-lead), Andrea Deghi (co-lead), Li Lin, Tatsushi Okuda, Mustafa Yasin Yenice, Aleksandr Zotov, under the guidance of Mahvash Qureshi, Ian Dew-Becker and Stefano Giglio as external advisors.

Resilience has always been a fundamental consideration for business, and in sectors such as banking and finance, it is a legal and regulatory imperative. Yet, it remains a highly specialised and often esoteric discipline, understood deeply by a few but rarely integrated across the organisation. Too often, it is confined to narrow domains such as financial strength, cybersecurity, or supply chain continuity, without sufficient attention to how the business actually functions on a daily basis. True resilience is rooted in the operating model. It requires a deep understanding of how work flows across functions, how decisions are made, how dependencies are managed, and where vulnerabilities lie. When these links are weak or unclear, an organisation’s ability to absorb disruption quickly deteriorates, regardless of the strength of its balance sheet or systems architecture. Critically, operational resilience is not just a structural or technical challenge. It is a human one. During times of disruption, it is people who determine whether continuity plans are executed or abandoned, and whether the organisation bends or breaks. Muscle memory, clear communication, and shared accountability become essential. If employees cannot recall, locate, or act on contingency plans under pressure, then those plans serve little purpose. Likewise, without mental resilience, the collective capacity to endure uncertainty and pressure, even the most sophisticated continuity strategy will falter. The organisations that stand out are those where belonging, purpose, and accountability are not abstract values but lived experiences. They create cultures in which individuals feel connected, understand their role in the mission, and take ownership in times of uncertainty. This cohesion becomes the glue that holds the business together when it matters most. Leading organisations are adopting a more integrated approach: Mapping value streams end to end to reveal both operational and human dependencies; Assessing vulnerabilities holistically across people, processes, and technology, rather than in isolation; Embedding continuity and recovery plans into everyday operations, ensuring they are rigorously tested and routinely rehearsed; Establishing real-time visibility into performance and risk indicators, allowing early detection and intervention under pressure. This reframes resilience from a compliance requirement to a core performance discipline. It enables stability and agility to coexist, allowing the organisation to absorb shocks, maintain operational flow, and adapt without losing momentum. Those who master this discipline will differentiate not only in crisis response but in everyday execution. In volatile conditions, operational resilience is becoming the definitive measure of organisational fitness.

Today marks a significant milestone in the financial sector: the EU Digital Operational Resilience Act (DORA) officially takes effect. Like many others around the Nordics and indeed the entire EU, we at Danske Bank have been working hard to prepare for this moment. So, what makes DORA different, and how does the world of operational resilience change starting today? 1. Operational Resilience Becomes a Regulatory Imperative DORA isn’t just a framework; it’s a paradigm shift. It moves operational resilience from a best practice to a legal requirement across the EU. Financial entities are now mandated to not only manage risks within their organization but to also ensure the resilience of their third-party providers, especially critical ICT service providers. 2. A Focus on Testing, Not Just Compliance Under DORA, resilience isn’t about ticking boxes. It’s about stress-testing your systems against real-world threats—cyberattacks, operational disruptions, or systemic failures—and demonstrating your capacity to maintain critical services in extreme conditions. 3. Bridging Cybersecurity and Risk Management Traditionally, cybersecurity and operational risk management have been siloed. DORA integrates them, creating a cohesive approach to managing risks that span technology, processes, and third-party dependencies. Again, while some have done this previously, it’s no longer optional. 4. Transparency and Accountability With mandatory reporting of major ICT incidents and the requirement to maintain a robust incident response framework, DORA increases accountability across the board. It demands that organizations not only respond to threats effectively but also report transparently to regulators and stakeholders - who have themselves been working hard to prepare for this. What Changes Today? For many of us in the financial sector, DORA isn’t a starting line—it’s a checkpoint. If your organization has been preparing effectively, today should feel like a natural extension of your resilience strategy. However, DORA brings clarity and consistency across the EU. Starting today, regulators will expect more than words; they’ll want evidence that your organization can adapt, recover, and thrive in the face of adversity. Why Does This Matter? Operational resilience isn’t just about compliance—it’s about trust. In a world where financial services are increasingly interconnected, disruptions don’t just hurt individual organizations; they ripple across the ecosystem. By enforcing resilience at all levels, DORA raises the bar for the entire industry. As we step into this new regulatory landscape, the question isn’t whether you’re compliant—it’s whether you’re resilient enough to lead the way. What are your thoughts on today? I’ll be surprised if any of you post that you’re glad the work is done; for myself, I feel like this is the latest step in what promises to continue to be a high-focus area!

The global financial system entrenches vulnerability and is structurally pro-cyclical. Climate change is amplifying those structural biases. A new ECB analysis on climate shocks & sovereign bond yields puts these dynamics into stark relief: https://lnkd.in/grtNu6CK But first, a step back. The global financial system is not neutral. - Income level shapes perceived risk; EMDEs are perceived as high risk. - financial architecture & ratings amplify that bias, rather than addressing vulnerability through counter-cyclical support & credible backstops Wealthy countries borrow in their own currencies. They have deep domestic capital markets that absorb shocks. Their central banks provide liquidity. They can sustain high debt w/out triggering panic. Poor countries must borrow in FX, exposing them to currency risk. Sovereign ratings don't consider pro-growth effects of long-term, concessional borrowing for public investment; all borrowing contributes to debt metrics. High borrowing costs for EMDEs constrain investment → constrained investment slows growth & weakens resilience → reinforces perceptions of risk → raises borrowing costs further. The cycle feeds itself. That is the core argument of our paper on Lowering Cost of Capital in EMDEs: https://lnkd.in/ghXsizrE Abundant global capital is least accessible/affordable to the countries that most need it. Climate now layers onto this structural bias. → When cost of capital is high, even compelling investments in clean energy, e-mobility and resilient infrastructure are not financeable. (a project that works at 3% financing may not at 9%). → The ECB analysis shows that EMDEs that cannot finance transitions then face higher spreads when decarbonization lags. → Limited fiscal space also means EMDEs underinvest in resilience. → The ECB analysis shows that when shocks occur, vulnerability is penalized again with higher yields. → Higher yields further constrain investment. Advanced economies face far more muted effects. In addition to the stabilization mechanisms they can access, debt tolerance is self-reinforcing. Climate change is amplifying the structural, pro cyclical inequality embedded in global finance. The answer is not for fiscally-constrained countries to borrow less. That deepens the trap. The imperative is to reverse the cycle: → Ensure EMDEs have access to long maturity, low cost finance for productive public investment. → Reform debt sustainability frameworks & sovereign ratings to recognize pro-growth effects of investment in infrastructure & resilience. → Scale guarantees/risk-sharing mechanisms so risks are distributed to those able to absorb them. → Extend liquidity backstops to EMDEs to prevent post-shock spirals. Correcting these structural biases would not only support sustainable development in EMDEs. It would accelerate the global transition, increase resilience, and strengthen market stability in the fastest growing economies in the world.

𝗡𝗮𝘃𝗶𝗴𝗮𝘁𝗶𝗻𝗴 𝘁𝗵𝗲 𝗦𝘁𝗼𝗿𝗺: 𝗛𝗼𝘄 𝗟𝗲𝗻𝗱𝗲𝗿𝘀, 𝗕𝗼𝗿𝗿𝗼𝘄𝗲𝗿𝘀, 𝗮𝗻𝗱 𝗖𝗼𝗻𝘀𝘂𝗹𝘁𝗮𝗻𝘁𝘀 𝗦𝘂𝗿𝘃𝗶𝘃𝗲 𝗠𝗮𝗰𝗿𝗼𝗲𝗰𝗼𝗻𝗼𝗺𝗶𝗰 𝗦𝗵𝗼𝗰𝗸𝘀 A regional bank approves a line of SME loans. Weeks later, inflation jumps. Borrowers miss payments. Consultants rush to restructure. The bank’s NPA ratio spikes. Businesses fold. Jobs are lost. Trust disappears. Macroeconomic shocks make everyone vulnerable, lacking a survival guide. Why Everyone in Lending Is on Edge 1. For Lenders -Growth targets clash constantly with soaring default risks. -A "secure" loan today might turn into a loss after a single repo rate increase. -Lend assertively yet adhere to strict rules—a paradox that disrupts sleep. 2. For Borrowers -Liquidity dries up even for robust businesses during economic upheavals. -Collateral values drop, and covenants become stricter—precisely when least needed. -You're left asking, “Do I pay interest or protect my people?” 3. For Consultants -You balance caution with urgency. -Cut costs too soon, appear alarmist; delay, and risk liability. -A single error or oversight can jeopardize a company's future. No Standard Playbook Exists 1. Economic Forecasts Are Moving Targets -A small change in inflation or GDP can disrupt lending models entirely. 2. Stakeholders Have Conflicting Survival Instincts -Borrowers seek flexibility. Lenders aim for repayment. Consultants mediate these tensions. 3. Compliance Kills Agility -Regulations designed to stabilize often stifle SME innovation. Hidden Emotional Costs 1. Lenders lose sleep over rethinking their loan decisions. 2. Restructuring, though essential, brings borrowers shame. 3. Consultants face the stress of having only less-wrong options. 5 Ways to Build Resilience: 1. Diversify risk in resilient sectors: Build "shock-tolerant" portfolios by diversifying risk into resilient sectors like healthcare or FMCG. 2. Use Transparency to Build Trust Transparent discussions foster trust and enable lenders to offer greater flexibility to borrowers. 3. Use Technology to Spot Trouble Early Utilize analytics and dashboards to spot early signs of defaults. 4. Push for Regulatory Adaptability Include "macroeconomic exception clauses" in loans, and consultants should advocate for SME relief in downturns. 5. Adopt tiered repayment plans to avoid balloon payment risks in downturns. The Unspoken Truth: Macroeconomic shocks undermine trust along with financials. Forecasts create doubt for lenders, borrowers conceal weaknesses, and consultants reassess their decisions. Beyond financial models, surviving the next shock calls for open dialogue, teamwork, and clear transparency. Your Turn 1. Lenders: How do you navigate risk during abrupt economic changes? 2. Borrowers: What tough decisions did you face recently? 3. Consultants: What's your main hurdle in advising under uncertainty? Start the conversation—our shared knowledge is vital in these times.