(Bloomberg) — The world is shifting from a period of post-Cold War stability and integration to one where rising geopolitical risks and strategic rivalry are forcing governments and companies to build costly safeguards, a senior official at the Reserve Bank of Australia said Friday.
“The international security and economic system is undergoing seismic adjustment – on a scale and speed unseen in eight decades,” said Bradley Jones, RBA assistant governor charged with oversight of the financial system. “The strategic environment is becoming more contested and complex.”
Global tensions driven by wars in the Middle East and former Soviet Union and a widening divide between autocratic and democratic governments have been exacerbated by the unpredictability of the second Trump administration. Coupled with a surge in technological breakthroughs that have opened new frontiers for crime and political interference, the peace of the 1990s seems long distant.
“For financial institutions, and even nations, self-insurance against a wide range of scenarios is assuming more prominence than at any time since the end of the Cold War,” Jones said during his opening remarks at an event in Sydney. “In short, the era of the peace dividend is over.”
For investors, the rise of self-insurance means capital is increasingly tied up in reserves, buffers and redundancies rather than productive use, pushing up costs for governments and companies. The trend is already evident in countries boosting foreign exchange reserves and gold holdings, stockpiling energy and food and reshoring supply chains.
For regulators, including the RBA, the challenge is ensuring that the heightened risk aversion doesn’t stifle innovation and competition. Jones said the shift in geopolitical stability and the rise of artificial intelligence is fueling a “new cyber arms race.”
He pointed to concentration of risk in cloud and other advanced technology service offerings as well as challenges arising from quantum computing.
“And while artificial intelligence (AI) could unleash a burst of productivity across industries and economies, my discussions with international counterparts reveal concerns about its potential to accelerate fraud, misinformation, and other sources of financial instability,” Jones said.
“One example is contagion and herding risk,” he said, “where parties could come to rely on similar models trained on similar data that therefore generate similar actions – including in a crisis.”
In addition, the complexity of AI systems developed outside the regulatory perimeter means that systemic vulnerabilities could grow in a way that is not obvious to the boards of financial institutions or supervisors, Jones added.
The assistant governor noted that the resilience of the financial system to disruptions to critical infrastructure – the electrical grid and telecommunications network – is also a growing focus. Jones pointed to the example of cascading power outages on the Iberian peninsula in April that led to a decline in economic activity.
That outcome would have been “worse still had the functioning of key financial infrastructure also been compromised,” he said.
Jones insisted that resilience should not come at the cost of innovation, competition and efficiency and that casting these objectives as a trade-off wasn’t helpful.
“Ensuring our financial system remains strong and resilient has never been more important,” he said. “If we are to meet this challenge head-on, we will need to harness the forces of innovation, competition and dynamism more fully and more creatively.”
The RBA is “committed to working constructively with industry to make this happen,” Jones added. “Australians are depending on all of us here to get this right.”
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