Governing Global Risk: A Study on the Relationship between Globalisation and Systematic Risk

Executive summary:

The current study deals with the concept of systematic risk and the effect of the global financial crisis on the organsations. The reserarcher has initiated to deliver the concept of the domino effect of crisis and the impact of the globalisation on the crisis. In this study6, the relationship between the globalisation and the systematic risk has also been established to serve the scenario of relationship between the globalisation and the crisis incidents. Moreover, the author has also attempted to serve real life example to gauge the effect of globalisation on credit crunch as faced by the countries in European region. The key aim of this study is to deliver the answer of how the globalisation worsens the domino effect of crisis, faced by the international bus8ness entities.

1.0 Introduction:

The current trend of the global market of economy is on the growth stage after a tricky recovery from the global financial crisis. However, the risks in the global market still affect the organisational operation over the global regions. In this context, McLean and Nocera (2010) stated that risk is a feature of the market that influences the market movements in terms of financial flow of income and expenditures and market share of a particular industry under the global market region. On the other hand, Yamai and Yoshiba (2009) opposed that risk is the result of globalisation and organisational operational conflicts that affects the market and other elements of the business. The current study briefs about the concept of systematic risk and its relation with the globalisation, the researcher has initiated to discuss the effect of globalisation on the domino effect of financial crisis to gauge the effectiveness of risk governing mechanism under the international business framework.

1.1 Systematic risk:

Systematic risk is associated to the entire market. As mentioned by Prescott (2010), systematic risk is very difficult to predict and avoid completely. It is related to the volatile nature of the market. Reinhart et al. (2008) mentioned systematic risk as the market risk that affects the entire market rather than affecting any particular industry or segment. Systematic risks cannot be mitigated through the diversification. The companies apply hedging techniques to avoid the systematic risk. On the other hand, Lorenzoni (2008) argued that by allocating the assets properly the companies can avoid the systematic risks.

One of the major reasons of the systematic risk is the deep recession. During the period of recession all the assets classes are affected in different ways. For example, during the global financial crisis of 2008, the MNCs faced the problems of systematic risk. The investors were afraid of investing money regardless of the securities of the portfolios. The immense competition in the market has encouraged the companies to operate in the global market. However, Rochet and Tirole (2007) mentioned that apart from the all the other kinds of risks the global companies are facing, market risk is the most severe. The companies need to cope up with the market risks in order to maintain sustainability.

1.2 Systematic risk under globalisation:

As mentioned above that the systematic risk is the type of market risk that hardly affects the organisations. However, Inui and Kijima (2010) stated that impact of the globalisation of the global financial market is debatable topic in the recent period globalisation where the financial distress has become the focus of the current policy debate. In this context, Kaminsky and Reinhart (2011) stated that global connectivity and rapid expansion of system integration across the globe lead to offer a vast number of benefits to the organisations that involves the growth in per capita income, educational background and technological innovation. However, globalisation also produces the repercussions of the domestic incidents that affect the financial activities over the cross border region. As a result, the financial turmoil and environmental disasters affect the global operational platforms.

According to Huang et al. (2009), globalisation has a relationship with the positive facade involving increasing income level, quality enrichment of products and services, incorporating diversified processes and enhancing techniques through incorporation of suitable innovation. The ill effects of the processes have been identified under the large scale implications on the contemporary world including threats of national security, negative consequences of economic turmoil and increasing conflicts between the geographic borders. Referring to this fact, Gordy (2009) viewed that analysing butterfly effect under the globalisation framework enables the international firms spotting gaps between the associated systematic risks and its effective management system. Detailed evaluation of the butterfly effect explores the process of new dynamics of rapid growth of globalisation to destabilise the societies. According to Lehar (2010), the new complications in the globalisation have no capability to sustain longer as the associated risks are more uncertain having wider impact on both the financial and non-financial activities. Therefore, the key aim of analysing butterfly defect is to ensure that risk mitigation process, specifically for the systematic risk in the interconnected global platform is crucial initiative for better economic stability.

1.3 Effect of financial crisis on global organisation:

The global financial crisis during the period of 2008-2009 has been found to be the key reason for economic downfall. The indication of the crisis has been appeared at the first quarter of 2008. The profitability drop of the Citigroup banking has led to a sharp downfall in the New York stock exchange. According to Froot (2011), the significant down fall in the Wall Street has affected the global business entities in the form of significant reduction in profitability due to rise in inflation and interest rates. Therefore, to minimise the gap of profit margin, the global organisations need to cut down the associated cost factors resulting comparatively lower GDP.  As a result, the employee redundancy over the globe has been observed that causes economic down fall in most of the territories operating under the international roof.

According to Garleanu and Lasse (2007), the systematic risk arises during the recession in terms of interest rates, exchange rates and the movement in price index of underlying stocks, traded in the stock exchanges. At the last quarter of the year of crisis has witnessed the bankruptcy of Lehman brothers, known as the oldest investment bank in UK. However, Gurdgiev et al. (2011) observed that as a result of the global financial crisis, the stock broking firms and the investment bank, Merrill lynch are taken over to recover the gap of profit margin. In that case, in order to protect the profitability of the firm consistently in future, Goldman Sachs and Morgan Stanley has moved its operation to seek banking status towards receiving protection from the bankruptcy. the economic downturn of the financial market is currently being matched up by the decline of the real economy. Therefore, the world has faced the phase of inevitable economic stagnation. Therefore, after the period of global economic crisis, the period of 2009 is likely to be difficult for the global economy to recover the gap of financial turmoil. Barro (2006) commented that turmoil of the international financial market has led to a further economic downfall in most of the western countries. As a result, the global economy has come on the edge of the worst economic downturn since the period of Second World War.


At the end of 2008, the IMF released a update of its economic outlook highlighti9ng the rapid economic deterioration resulting devaluated global real GDP growth during 2008-2009. A significant downgrade for the real GDP in 2009 has been expected to growth by 5.1%, compared to 6.1% forecasted in October 2008. In word of Acharya and Tanju (2007), the emerging economy has accounted 100% of the growth in international context in 2010. On the other hand, Borio and Mathias (2009) mentioned that the recent financial crisis has exemplified the new form of systematic risk, characterising the coming decades. Therefore, the issues relating to the systematic risk is the key concern of every organisation in the areas of supply chain, pandemics, infrastructure, ecology and the changing climate of economy and political background. In this context, Christiansen et al. (2009) suggested to address the concerns to better manage the systematic risk factors to protect the economy from xenophobia, de-globalisation, national and global conflicts and the slower economic growth.

1.4 Domino effect of crisis:

The global financial market have been found in a financial cycle that in turn seem to earn greater number where the number is associated with the domino effect of crisis. In this context, Gurdgiev et al. (2011) explained domino effect as the chain reaction of financial outcomes due to the unexpected economic events in both national and global platform. The reaction under the domino effect is often found under the activities of social, political and economic players. The three types of domino effect are socio-political, economic and financial. However, the characterisation of the domino effects is performed since intensification of the European sovereign debt crisis. Christiansen et al. (2009) obtained that European domino effect is the combination of political, economic and financial elements set by the unique factor over the time. Each type effect is playing out in the market in unique way that has been characterised in the criteria as risk on and risk off.

1.5 Effect of globalisation on monitoring effect of crisis:

According to Froot (2011), the international policy makers are transforming to the hostage to the global financial market that in turn intends of impress with more creative measure lacking credibility due to the overwhelming condition of market uncertainty. Therefore, the negative reaction of market affects the economy due to tight credit condition. As a result, the financial domino effect is transformed into the economic domino effect in the global economic frame. However, Christiansen et al. (2009) found that the economic domino effect is transformed into the political domino effect due to incorporation of politicians’ reactions with more measures. Therefore, such effect influences protests on the streets. The domino effects work through the channels of contamination in terms of pollution, corruption, currency borrowing, trade balances, level of outstanding government debt and the fi9nancial state of the domestic banking mechanism. Recently, the European leaders reached another deal to stop the corruption. About 17 nations use the euro that attempts solving the crisis. Some of the examples of the domino effect in European debt crisis are as follows:


The country has carried out a huge debt of 340 billion Euros where in the last quarter of 2009, after the speculation of debt crisis in Iceland and Middle East, Greece have repaid the debt finally the highest debt in the modern history. After the repayment, Greece has passed bailout of 110 billion euro where further bailout could cause significant losses for the French and German banks (BBC News, 2011).


The country possessed highest total debt in the euro zone with stagnant growth rate. The rate of selling debt has been reached the highest at 6% where rome has laid out the austerity measure of 60 billion Euros aimed to balance the budget within 2013. However, the market has been co0ncrned about the debt load in relation to the GDP as the amount of debt has been remarked as the second highest after Greece in the euro zone (BBC News, 2011).


The housing section has been crashed due to load of bad debt in its banking section and highest unemployment rate in the euro zone. The Spain has observed record cost of borrowing currently that enforces the government to develop suitable austerity measures to get the financial structure under controlled. This is the reason why euro zone has initiated to reduce its cost of borrowing rather offer loans (BBC News, 2011).


The banks in this country have carried out a heavy exposure to the Greek debt. As a result, the banks of the country have observed a sharp fall in the stock market till the public finances have not yet been questioned by the market (BBC News, 2011).


Opposite scenario has been found in case of Germany as the country has enjoyed the dynamic economic growth in terms of GDP that rose by 3.6% in 2010. As a result, the unemployment rate is relatively lower than the period before 2008. The central government has cut down the budget deficit by 80 billion Euros by 2014 (BBC News, 2011).


The UK banks have heavy exposure to the Irish with having safe position in terms of economic uncertainty where its euro zone neighbours have faced turmoil. As a result, the coalition government has announced the biggest cut in the state spending since the Second World War. In this context, it has been observed that the UK gilts has been recognised as one of the safest investments in the world, with the decreasing borrowing cost in the recent years (BBC News, 2011).

Irish republic:

The banking system of the country has been collapsed as the biggest banks within the country are undertaken by the government, in order to control the financial crisis for recapitalisation. The cost of recapitalisation has been amounted to about 70 billion Euros. Irish republic has received a bailout having worth of 85 billion from the euro zone and IMF. As a result, the republic has passed the most difficult budget in nation’s history (BBC News, 2011).


The national budget of the country has negatively be affected by the shrinking economy. The country has been ranked third in gaining bailout of worth 78 billion Euros. The previous government has failed to pass the austerity measures that have been passed by the current government and this could be identified as the reason of fall of previous government (BBC News, 2011).

1.6 Conclusion:

Referring to the above discussion, it could be inferred that systematic risk grows due to the uncertain states of market. However, the global financial crisis has a significant effect on the international organisations in terms of the profitability. In that case, domino effect could be effective measure to gauge the type of the risks associated with the financial downfall. Moreover, globalisation has an effect on the ec0onomic status of the country in terms of education, financial stability, income level and innovative technology. On the other side, it has also been observed in this study that the effect of financial crisis in terms of debt obligations does not have impact on every organisation where some have enjoyed economic boost at the time of recession depending on economic policies of the organisation.




Acharya, V. V. and Tanju Y. (2007) “Too Many to Fail – An Analysis of Time-inconsistency in Bank Closure Policies,” Journal of Financial Intermediation, 16(1), pp.1-31.

Barro, R. (2006) “Rare disasters and asset markets in the twentieth century,” The Quarterly Journal of Economics, 121, pp. 823-866.

Borio, C. and Mathias D. (2009) “Assessing the Risk of Banking Crises revisited,” BIS Quarterly Review, 12, pp. 29-46.

Froot, K. (2011), “The Market for Catastrophe Risk: A Clinical Examination” Journal of Financial Economics, 60(2), pp. 529-571.

Garleanu, N. and Lasse H. P. (2007) “Liquidity and Risk Management,” The American Economic Review, 97(2)2, pp. 193-197.

Gordy, M. (2009) “A Risk-Factor Model Foundation for Ratings-Based Bank Capital Rules,” Journal of Financial Intermediation, 12, pp. 199-232.

GURDGIEV, C., LUCEY, B., BHAIRD, C., and ROCHE-KELLY, L. (2011), “The Irish Economy: Three Strikes and You’re Out?”, Panoeconomicus, 58, pp. 19-41.

Huang, Xin, Hao Z. and Haibin Z. (2009), “A Framework for Assessing the Systemic Risk of Major Financial Institutions”, Journal of Banking & Finance, 33(11), pp. 2036-2049

Inui, K., and Kijima, M., (2010). “On the significance of expected shortfall as a coherent risk measure”, Journal of Banking and Finance, 29, pp. 853–864.

KAMINSKY, G.L., and REINHART, C.M. (2011), “On crises, contagion, and confusion”, Journal of International Economics, 51, pp. 145-168.

Lehar, A., (2010), “Measuring systemic risk: A risk management approach”, Journal of Banking and Finance, 29, pp. 2577–2603.

Lorenzoni, G. (2008) “Ine_cient Credit Booms”, Review of Economic Studies, 75(3), pp. 809-833.

Prescott, E. S. (2010). “Can Risk-Based Deposit Insurance Premiums Control Moral Hazard?” Federal Reserve Bank of Richmond Economic Quarterly, 88, pp. 87–100.

Reinhart, Carmen M. and Kenneth R. (2008), “Is the 2007 US Sub-Prime Financial Crisis So Dierent: An International Historical Comparison,” American Economic Review: Papers & Proceedings, 98(2), pp. 339-344.

Rochet, J. and Tirole, J. (2007) “Interbank Lending and Systemic Risk,” Journal of Money, Credit and Banking, 28(4), pp. 733-762.

Yamai, Y. and Yoshiba, T. (2009) “Value-at-risk versus expected shortfall: A practical perspective”, Journal of Banking and Finance, 29, pp. 997-1015.

BBC News, (2011). The domino effect in Europe’s debt crisis. [online] Available at: [Accessed 17 Nov. 2014].

Christiansen, C., Ranaldo, A. and Söderlind, P. (2009). The time-varying systematic risk of carry trade strategies. London: Centre for Economic Policy Research.

Lazear, E. (2014). The Euro Crisis: Doubting the ‘Domino’ Effect. [online] WSJ. Available at: [Accessed 17 Nov. 2014].

McLean, B. and Nocera, J. (2010). All the devils are here. New York: Portfolio/Penguin.



error: Content is protected !!