Key risk categories include 1) financial risks such as credit risk (including settlement and transfer risk), market risk (trading, non-trading and traded default risk), liquidity risk, business risk (including tax and strategic risk), and 2) non-financial risks (NFRs) including reputational risk and operational risk (with important sub-categories compliance risk, legal risk, model risk, information security risks, fraud risks, and money laundering risks). We manage the identification, assessment and mitigation of top and emerging risks through an internal governance process and the use of risk management tools and processes. Our approach to identification and impact assessment aims to ensure that we mitigate the impact of these risks on our financial results, long-term strategic goals and reputation. Please refer to section "Risk and Capital Management" for detailed information on the management of our material risks.
As part of our regular risk and cross-risk analysis, sensitivities of the key portfolio risks are reviewed using a bottom-up risk assessment and through a top-down macro-economic and political scenario analysis. This two-pronged approach allows us to capture not only risk drivers that have an impact across our risk inventories and business divisions but also those that are relevant only to specific portfolios.
Political risks remained at a heightened level during the fourth quarter of 2016. Markets generally reacted positively following the November 2016 US presidential election, as the USD appreciated and bond yields increased in anticipation of potential fiscal stimulus and higher economic growth, although emerging markets underperformed amid capital outflows. In Italy, the ‘No’ vote in December on the constitutional reform referendum was widely expected by markets, with near-term risks centered on the fragile banking system. Oil prices rebounded as OPEC agreed to implement production cuts. We expect that political uncertainty will continue to dominate risks in the euro area in 2017, with elections in several key European economies to occur against a backdrop of potentially tense Brexit negotiations following the triggering of Article 50 of the Treaty on the European Union by the UK, which is expected to occur by end-March 2017. A potential shift towards a more protectionist policy stance in the U.S. would put pressure on its key trading partners including China and Mexico. Selected Emerging Markets face elevated political and security risks.
The assessment of the potential impacts of these risks is integrated into our group-wide stress tests which assess our ability to absorb these events should they occur. The results of these tests showed that the currently available capital and liquidity reserves, in combination with available mitigation measures, would allow us to absorb the impact of these risks if they were to materialize in line with the tests’ parameters. Information about risk and capital positions for our portfolios can be found in the “Risk and Capital Performance” section.
Consistent with prior years, 2016 continued to demonstrate the trend of increasing global regulation of the financial services industry, which we view as likely to persist through the coming years. We are focused on identifying potential political and regulatory changes and assessing the possible impact on our business model and processes.
The overall focus of Risk and Capital Management throughout 2016 was on maintaining our risk profile in line with our risk strategy, increasing our capital base and supporting our strategic management initiatives with a focus on balance sheet optimization. This approach is reflected across the different risk metrics summarized below.