Geopolitics, sustainability, and financial crime are the key focus areas shaping the work of the Frankfurt Institute for Risk Management and Regulation (FIRM) this year. Geopolitical challenges, in particular, have increased significantly, even before Donald Trump’s renewed inauguration as US President on 20 January.

„There are many geopolitical risks, but the following three have the greatest impact“, FIRM Chair Gerold Grasshoff tells Börsen-Zeitung. First, the power struggle between the US and China and a potential invasion of Taiwan. Second, Russia’s war against Ukraine. And third, conflicts in the Middle East, especially between Israel and Iran and its proxies Hamas and Hezbollah.

These themes, which have dominated geopolitical discussions for about 18 months, are likely to worsen under Trump's renewed presidency, according to a recent FIRM position paper. His victory signals a shift in US policy, creating significant uncertainties for German and European financial institutions. Trump's first term (2017–2021) provides clues about what to expect: aggressive deregulation, unilateral tax reforms, and a protectionist trade agenda.

Grasshoff and his co-authors, Til Bünder and Emilia Zimmermann, anticipate that Trump's America-first policies will intensify. „The changing environment presents direct and indirect challenges for European banks, raising concerns about regulatory divergence, market volatility, and the stability of transatlantic economic relations“, the position paper states. „From trade wars to military confrontations, today’s landscape is marked by multiple conflict zones escalating simultaneously, creating a high degree of unpredictability.“

Grasshoff outlines what banks should do to assess the impact of geopolitical crises on the financial sector: develop multiple scenarios, analyse and quantify impacts across various risk categories, and derive risk mitigation strategies for the German and European financial sector. „The proven approach is not to consider geopolitics as a separate risk category but rather to run different geopolitical scenarios“, explains Grasshoff. „We think in terms of scenarios, identify risk drivers, and translate them into conventional financial risks, namely credit risk, market risk, and liquidity risk, as well as non-financial risks.“ Non-financial risks primarily include financial crime, such as money laundering and sanctions evasion, along with cyber, IT, and data security risks, as well as reputational risks.

Institutions must increasingly address the latter, says the FIRM Chair. He highlights one key question: „How can I manage reputational risks in the digital age, particularly those arising from fake news?“

Regarding the fight against financial crime, Grasshoff believes that European banks must adapt to higher standards. A major indicator of this is the establishment of the European Anti-Money Laundering Authority (AMLA), which has begun operations in Frankfurt, and is expected to be fully functional by 2028.

Some institutions still have significant work to do regarding risk culture. Banking inherently involves risks, but these must be clearly defined, continuously benchmarked against standards, quantified, and assigned clear managerial responsibilities. „If this is not established and exemplified at the top, it becomes very difficult“, he warns, citing Credit Suisse as an example where structural problems accumulated over many years without being addressed.

Concerning sustainability, Grasshoff identifies three key areas of debate. While the global significance of the issue is undisputed, Germany’s contribution must always be viewed in an international context. Measures for the energy transition must therefore be carefully considered to ensure that green technologies and high energy costs do not excessively burden economic viability.

Another critical question is how sustainability measures affect the economy’s capital stock. Research suggests that increasingly regulated companies in Germany and Europe are selling off „brown“ assets to reduce their carbon footprint and meet green regulations. „However, if these assets are purchased by companies or investors not subject to such regulations, there is no actual reduction in CO₂ emissions or other sustainability criteria", he says. „If these assets are sold at a discount, we end up with a loss of wealth for our economy but no global sustainability benefit. In simple terms, we might become poorer, but not greener“.

He criticises the narrow focus on carbon emissions in sustainability discussions, noting that other issues like biodiversity and ocean pollution receive less attention. Grasshoff is sceptical of Europe’s regulatory approach, which pressures banks to drive the green transition through financing. „Half of the emissions data is still missing, and only a small fraction of European companies have a valid transition plan that meets Carbon Disclosure Project criteria“, he points out. The real danger is losing sight of the broader environmental, social, and governance (ESG) goals.

Grasshoff calls for an honest debate: „Well-intended proposals sometimes lead to bad outcomes." He stresses the importance of addressing this openly, as otherwise, the fundamental and existential idea of sustainability could suffer. „Experience shows that smart regulatory frameworks that encourage market-driven behavior and ultimately foster innovation are more effective than rigid mandates and bans designed to steer economic activity in a specific direction“, he argues.

Gerold Grasshoff is Managing Director and Senior Partner at Boston Consulting Group (BCG), and Chair of the Frankfurt Institute for Risk Management and Regulation (FIRM). Founded in 2009, FIRM is a network comprising several dozen institutions, including banks, financial service providers, consulting firms, and associations, as well as Deutsche Börse, BaFin, the state of Hesse, and the House of Finance at Goethe University. Esther Baumann serves as FIRM’s Executive Director. At BCG, Grasshoff leads the Risk Task Force and global risk management efforts for financial institutions. He joined BCG in 1997.