NY Fed lists inflation and monetary policy as top risks for the next year

The news: The NY Fed’s Financial Stability Report surveyed 26 industry experts from broker-dealers, investment firms, and universities between August and October to create a list of the most-cited financial risks of 2022.

What are the top risks?

Inflation and monetary tightening

  • This risk topped the list as respondents said inflation has been more persistent than anticipated and monetary policy has been more restrictive than expected.
  • Some fear that a pause in monetary tightening or a pivot to looser policy will cause another wave of tightening down the line that will cause major market volatility.
  • Consumers worldwide are seeking assistance from their financial institutions to help them overcome the downturn, but many don’t believe they’re getting the help they need.

War in Ukraine/geopolitical risks

  • Some respondents believe the conflict in Ukraine will continue to escalate in 2023.
  • The conflict is contributing to the worsening economic outlook in Europe. Many fear the deterioration will spill over into the US through trade and the financial markets.
  • Some respondents also cited the increasing tensions between China and Taiwan, and speculated that any US involvement would worsen supply chain pressures and negative investor sentiment.

High energy prices

  • High energy prices, especially in Europe, have been fueled by the geopolitical tensions in Ukraine. This is likely to continue and potentially affect other non-European countries as well.
  • The European Central Bank has urged banks to analyze the impact of a complete gas stoppage and to prepare for the worst.

Underregulated nonbanks

What’s surprising?

Cryptocurrency

  • Cryptocurrency didn’t make the top 10 potential risks, despite a chaotic year that saw the collapse of many prominent crypto exchanges.
  • The crypto winter looks to be a long way from thawing, but as the crypto markets recover from the FTX fallout, regulators are feeling increased pressure to set industrywide standards.

Cyberattacks

  • Cyberattacks also failed to make the top 10, though ransomware poses a significant and increasing threat to banks.
  • US banks and financial institutions spent almost $1.2 billion in ransomware-related payments in 2021—nearly triple the previous year, according to the US Treasury Department.
  • Cybersecurity was a leading concern for US bank executives polled this year by Cornerstone Advisors, second only to attracting qualified talent.

Most-cited potential risks over the next 12 to 18 months. Source: The Federal Reserve System

This article originally appeared in Insider Intelligence’s Banking Innovation Briefing—a daily recap of top stories reshaping the banking industry. Subscribe to have more hard-hitting takeaways delivered to your inbox daily.