The world view of globalization brought about affluence in many quarters but the increasing interconnectivity also heralded a new era in understanding risk.

The challenge of managing risk has become more complex and diverse than ever, driven in large part by increasing regulatory mandates, the explosion of technological and financial innovation and the growing interconnectedness of global markets.

As I write there is much consternation among many financial commentators and experts about the banking environment in China and whether we should be expecting another Lehman’s moment.

Whether we should or not, the point is simple. What happens across the globe impacts what happens here. In the Global Credit Crisis, the contagion in the US impacted mortgage-backed securities here in the UK even though they were like chalk and cheese compared to US originated securities in their performance. It was irrelevant. The flight to safety meant everyone was impacted.

There has been since 2008 a slew of studies undertaken to better understand the role of interconnectedness in the transmission of risks. A major finding of these studies is that financial networks tend to be robust yet fragile, absorbing shocks up to a certain tipping point, beyond which they spread risks rather than contain them.

It’s not clear that we are any closer today to fully understanding which elements of global interconnectedness offer better protection from shocks and which hasten global impacts.

Looking after the big players

What we have seen is that policy makers will always, understandably, race to protect the largest that are too big to fail. This is fine if you are one of them – not so good if you are a smaller lender for example.

Today’s lending boardrooms are analysing, measuring and quantifying the impacts of an expanding list of risk categories, including operational, those embedded in the eco-system, technology risks from legacy and new platforms, supplier risks, business continuity and environmental physical risk. This makes sense. Without a deeper understanding of the breadth of risks businesses face and their interconnectivity, we are only addressing part of the problem.

But it is exhausting and the work of many – not all of whom recognise the patterns that matter. I happen to believe that foremost among these risks is funding. Whether that be drawn from retail or wholesale sources, funding should be considered from a global standpoint.

Wholesale money and funding opportunities are international by their nature but even domestic retail funding can be impacted by the decisions made in other countries – whether they affect the depositor positively in terms of foreign bank competition for those deposits or negatively in forcing up the cost of living and driving savers to spend their deposits to sustain their way of life.

Boardroom understanding

Whatever your model it needs to be reviewed regularly and steps taken to ensure what happens in the business; is actually what is understood and desired in the boardroom.

So, if funding is international, it is easy to see why concerns about what is occurring to the property and banking landscape in China are not misplaced. If the butterfly effect in nature holds true, that when something small can occur to create huge change elsewhere, then we should hardly be surprised when a seismic crisis elsewhere creates a tsunami in an interconnected world.

Risk management has probably had to evolve more than any other branch of business in living memory. Unpredictability simply means having to have more expertise and experience to hand than before in order to join up the dots that really impact your business.

The butterfly effect reminds us that even the smallest action can have far-reaching consequences.

Tony Ward is non-executive chairman of Fortrum UK