‘Whistling past the graveyard’: Archegos meltdown – yet another shockwave in the financial sector

Lending banks are often thought be the major holders of international exposure and therefore country risk. Non-bank financial institutions (NBFIs) — hedge funds, pension funds, private equity funds and others — often incur and accumulate significant country risk as well.

Of timely importance, the recent failure of family office Archegos (see Case Examples in the paper) highlights the risk leveraged exposure presents to any firm’s ongoing financial solvency, and has implications for understanding country risk for NBFI’s.

While Archegos did not fail due expressly to foreign asset exposure (an example of country risk), it’s financed exposure to foreign securities can be construed as risk intensive behavior, as “booked” country risk, and as an example of “whistling past the graveyard” in this respect.

Moreover, the leveraged concentration risk which Archegos booked entailed another consequential one – event risk. Country risk – as manifested through sudden geopolitical developments, sharp changes in national policies, and institutional fragility – is an exemplar of event risk.

Takeaway: For NBFIs, it is important to be a pro-active risk manager and to manage leveraged exposure and concentration risk. This is one of the few practical ways to protect an institution from a sharp, unanticipated event risk episode. To do so, again, requires the organization to be pro-active and to ensure effective communication among Risk, Business, and Executive Leadership.