Hollywood likes to serve up big-budget disaster movies in early summer or the last few weeks of the year. The year the Financial Stability Oversight Council has joined the fun with its 2021 Annual Report to Congress. This report leads with huge, dramatic, eye-catching dangers: climate change, pandemics and cyberattacks. Each has spawned disaster movies, television shows and novels. Each is of intense political interest, which can be handy when asking for bigger budgets and more power. But planning for Hollywood disaster movies leads to poor risk management.
Climate change, for example, could threaten financial stability in many ways. It could cause a natural disaster that knocks out many key financial institutions—like Superstorm Sandy but bigger and global. Rising sea levels could erode the value of real estate that was supposed to be uncorrelated and cause unexpectedly large losses in securities. Government regulations to reduce CO2 emissions could harm the value of fossil fuel reserves, oil companies, car manufacturers and others, perhaps leading to corporate and government defaults and bank failures. It’s easy to come up with dozens of others.