TAIL EVENTS ARE HAPPENING MORE OFTEN – WHITEPAPER BY ACTIVEVIAM & ALBA PARTNERS

As we follow the general theme of this white paper we can almost follow the development and evolution of Operational Resilience through the financial and geopolitical events of the past decade.

Let’s take a moment out to reflect on the “good old days” when interest rates and inflation were low, we lived in (for the most part) peaceful times and apart from some issues which may have impacts in the future (AI and Climate for example) there was little to sway us from a carefree path. In this most perfect of worlds, resilience (and the need for it) had not been invented, our infrastructures were protected by robust disaster recovery processes and tail events were those rare ructions that risk managers built stress tests around to demonstrate preparedness. To put this into context it was only 18 years ago that Nassim Taleb invented the term “Black Swan” (1st edition published 2007).

We now live in a very different world, effectively the past decade has seen a financial and geopolitical regime change, it is as if the world has been turned upside down. The subject of this section therefore is how do financial and geopolitical changes impact Operational Resilience and why is it that “tail events seem to be happening more often”? This is hardly surprising when we think of the three main contributors to the current suite of these Black Swans, namely geopolitical, AI and climate. As all three are now experiencing increased volatility, given their interconnectedness, we would expect to see an increased frequency in Black Swan events. But why does this seem to impact Operational Resilience?

Let’s first explore the significantly increased complexity in our financial framework. The geopolitical environment has become a lot more uncertain, and as a consequence significantly more volatile. Strategies need to be fluid and flexible, responses to events more timely and reactive and staff all performing at the top of their game.

There has been a surge, or more accurately an explosion in demand from consumers for tailored products/services, all to be delivered almost instantly. In order to satisfy this demand, physical and financial supply chains have had to become more efficient, with just in time delivery tolerances being shaved to razor thinness. All of this has been predicated on a flexible global supply chain (for physical goods) and IT systems and products which can ensure that this supply is done in the most flexible and efficient manner possible. Banking and financial services are no different with there being more bespoke products and increased demands from clients.

Such complexity carries increased risk. Disruption throughout this physical/financial supply chain has knock-on effects which (to steal the phrase from the financial regulator) cause “intolerable harm to the consumer”.

Let’s now explore the areas where there is the most complexity, and the risks that this entails.

The first is of course the increasing concentration of services and products onto a small number of suppliers. The most obvious here is that around the “Tech Titans”, namely Alphabet, Amazon, Apple, Meta and Microsoft. Financial services have, for the large part, developed infrastructures which are almost wholly reliant on these technologies. The concentration risk here is evident, and of course significant. We now go on to state the obvious, where we have a highly regulated financial services sector highly concentrated into a (largely) unregulated third party systems provider. Now, if we overlay this with the evolving political situation in the US (of which regulations these companies are subject to) we can start to see how political divergence can lead to financial framework instability and hence risk. The concentration risk, and consequences of a failure in any of these “Tech Titans”, would be significant. This concentration again is not just limited to the IT sector. One such example is that of rare earth magnets, 90% of which are supplied by China. A temporary ban on the export from China of these magnets in April 2025 caused significant downstream production delays in dependent industries across the globe. These are used by high-tech industries, from automotive and semiconductor to defense, aerospace and robotics.

The second is that of consumer demand and the “supply chain” needed to support it. The obvious category here is of course IT systems. They have now become increasingly sophisticated with AI being used across many sectors to augment the customer experience. With increased complexity comes increased risk. The failure of any component (either through accident or malicious intent) can have significant impacts further on the services sector (of which there are many documented examples).

We have seen cases where well known UK retailers have suffered major outages due to cyber attacks (and as we write this paper are still trying to recover weeks after the attack) as well as a leading automotive company being unable to sell its products over the course of a weekend because of issues with its order/inventory systems. Outside the IT environment we also have real risks to concentrated and complex supply chains. Who can forget the impact on the global supply chain when a single ship became lodged in the Suez canal or the disruption caused when a bridge in Baltimore was suddenly rendered unusable?

The increased use of AI has of course not been limited to those “honest brokers” in the various products of which it is employed. We now have Cyber attack “franchises” where aggressive DDOS tools can be rented. Malicious agents are not bound by policies or procedures, UAT, release schedules and production release windows. Their time to market is a fraction of the time that those on the other side of this arms race face. The genie is out of the bottle, and even a slow down by honest brokers in the use of AI will not slow those with malicious intent down. Now throw into the mix geo-political objectives and the result is a dangerous cocktail of a well funded and capable attack force.