Navigating Modern Financial Risks: New Frameworks for Credit, Geopolitics, DeFi & Systemic Stability

In an increasingly complex financial landscape, understanding and managing risk has never been more vital. Whether it’s the foundation of credit risk in traditional banking, the systemic risks embedded in global financial networks, or the transparency challenges in decentralized finance (DeFi), today's financial leaders must be equipped with robust tools and frameworks. This week’s assorted links explore timely insights—from Basel's revised credit risk principles to novel approaches for assessing geopolitical and systemic risk, and a groundbreaking proposal for a verifiable Total Value Locked (TVL) metric in DeFi.

I. Principles for the Management of Credit Risk

The Committee has revised its principles for the management of credit risk (Credit Risk Principles). These principles provide guidelines for banking supervisory authorities to evaluate banks' credit risk management processes in four key areas: (i) establishing a suitable credit risk environment; (ii) operating under a sound credit-granting process; (iii) maintaining an appropriate credit administration, measurement and monitoring process; and (iv) ensuring adequate controls over credit risk (BIS).

II. Risk rebalancing: Five important geopolitical-risk questions for CIOs

CIOs need to apply a much broader view of possible failure modes, where their assets are, and where the people who manage the assets are working (McKinsey).

III. Towards verifiability of total value locked (TVL) in decentralized finance

Total Value Locked (TVL) aims to measure the aggregate value of cryptoassets deposited in Decentralized Finance (DeFi) protocols. Although blockchain data is public, the way TVL is computed is not well understood. In practice, its calculation on major TVL aggregators relies on self-reports from community members and lacks standardization, making it difficult to verify published figures independently. We thus conduct a systematic study on 939 DeFi projects deployed in Ethereum. We study the methodologies used to compute TVL, examine factors hindering verifiability, and ultimately propose standardization attempts in the field. We find that 10.5% of the protocols rely on external servers; 68 methods alternative to standard balance queries exist, although their use decreased over time; and 240 equal balance queries are repeated on multiple protocols. These findings indicate limits to verifiability and transparency. We thus introduce "verifiable Total Value Locked" (vTVL), a metric measuring the TVL that can be verified relying solely on on-chain data and standard balance queries. A case study on 400 protocols shows that our estimations align with published figures for 46.5% of protocols. Informed by these findings, we discuss design guidelines that could facilitate a more verifiable, standardized, and explainable TVL computation (BIS).

IV. Systemic financial risk analysis of the U.S. based on the complex network

This paper proposes a new framework for measuring systemic financial risk, which combines the Diebold and Yilmaz spillover index model, complex network, and dimensionality reduction method. This framework simulates the process of risk contagion through network dynamics, accounting for the coupled relationships between internal indicators and addressing the high-dimensional issues of financial networks. We conducted a study of the U.S. financial system from a dynamic perspective using a rolling window approach. The results reveal a strong alignment between total risk spillover and total risk contagion, and the analytical solutions and simulation results of systemic risk are consistent, which indicates the effectiveness of the measurement method for systemic financial risk proposed in this paper. Additionally, we find that hub centrality (HC) and global importance of nodes (GIN) influence the ranking algorithms' performance in identifying the nodes with the greatest influence on total systemic risk within the risk spillover networks. Furthermore, enhancing the risk resistance of a node is highly important for improving the stability and resilience of the financial system. The framework proposed in this paper provides a quantitative tool for real-time measurement of systemic financial risk and offers theoretical tools for risk managers to grasp the direction of risk management, which is crucial for the timely identification and prevention of financial crises (Journal of Management Science and Engineering).

As financial systems evolve and decentralize, the need for standardized, transparent, and forward-looking risk management becomes more urgent. The articles featured this week underscore a shared imperative: whether you're a central banker, CIO, or DeFi developer, aligning on clear principles and verifiable metrics is key to building trust and resilience in the face of uncertainty.

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