Globalization: How Systemic Risks Have Altered the Financial World

When the present Lloyd’s building was completed in 1986, the architecture was called high tech, but inside you would have found that the offices contained no Internet, no e-mails and no World Wide Web. Since the construction of this building, our political, technological and trading systems have fundamentally changed. Business has been quick to take advantage of the new opportunities to sell goods and services all over the world. Since 1986, there has been a sevenfold increase in imports and exports.

Triumph and Systemic Risk

In the 1990s, and for the early part of this century, it really did seem to be a case of the triumph of the West. Then, one day early in the autumn of 2008, Lehman Brothers’ collapsed, and across the West, bankers, who had for years been lionized as great generators of wealth, were quickly rebranded as the pariahs of the global economy, as their organizations went to the taxpayer cap in hand.

Lots of column inches have analyzed what went wrong. But one phrase, I think, sticks in the mind above all: systemic risk. The barriers which had been lifted to allow goods, capital and people to travel freely from country to country had also created a free conduit for risk to travel the same path.

We are now all very familiar with risks associated with the movement of capital, or debt. But this is not the only potential systemic risk for businesses. From pandemics, to supply chain failures, globalization means that businesses are exposed to events which happen far away from their head offices.

Distance is no longer nature’s insurance policy which insulates you from the disasters and tragedies happening on the other side of the world. When the Icelandic volcano last erupted in 1821, it poisoned a few cattle who were grazing on its slopes. One-hundred ninety years later, it caused chaos among airline passengers throughout the world, with an estimated loss in Europe of £400 million [$608 million] a day in lost productivity.

International businesses are both the victims and the beneficiaries of globalization. They also have a third role, as they are highly active agents in creating and managing the global frameworks which move people and goods around the world.

What the Future May Hold

The characteristic which distinguishes between failure and success will require a mobility of mind as much as a mobility of action. We need to think global. We need to know what is happening in the countries where we build factories, invest capital or sell services. We need to understand the risks in these places and crucially how a failure in location X will affect our operations in location Z.

Today’s international business doesn’t belong to any one country. Lloyd’s is a case in point. We are proud of our 300-year heritage as a British and as a City of London institution. But we are keenly aware of our role as the market where the world brings its risks. Every day I hear brokers having rapid conversations on their mobile phones in Spanish or, Japanese or in Italian. Wherever I travel in the world, I meet the CEOs of airlines or construction firms who insure huge investments with Lloyd’s.

One of the great lessons of the financial crisis has been the need to bring a sense of duty back to the boardroom. And global firms must accept that they have responsibilities across the world, not simply in their home countries.

Perhaps effective international co-operation is easier during a crisis. Certainly, what we are seeing in the wake of the financial crisis is a great rise in the number of regulations across the globe, but the amount of co-ordination and coherence between these regulations should be better.

In the foreseeable future, I predict that businesses will need to navigate a variety of regulations. They will also need to take responsibility for managing the risk in their own international activities and networks. This is precisely how it should be.

We cannot go backwards. We must not go backwards. We should not be protectionist. Instead we must manage these risks better. We are not the first generation to experience rapid technological advances. Business models, and particularly our risk management systems, must change as the risks change. We cannot simply hide away from risks, which travel further and faster than ever before.

The above is an excerpt from a speech give by Lloyd’s Chairman Lord Levene at the opening of Lloyd’s conference on Globalization, held July 14, 2010.

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