PwC Luxembourg Warns of 5 'Megathreats' to Financial Stability

On Monday 12 May 2025, PwC Luxembourg released a report titled Managing Systemic Risks in the 21st Century, identifying five major “megathreats”, namely climate change, technological disruption, geopolitical instability, demographic shifts and sovereign debt crises, as growing risks to financial stability.

These are explored through six high-impact scenarios, including the drying of the Panama Canal, a coordinated BRICS (Brazil, Russia, India, China, South Africa) sovereign debt cancellation and the bursting of the artificial intelligence (AI) investment bubble.

The report argued that continued reliance on traditional risk models is problematic, as these may fail to account for the ripple effects of global disruptions that are increasingly prevalent. Instead, PwC has advocated for the use of reverse stress testing - a method whereby financial institutions first define what would constitute a catastrophic outcome for them, then work backwards to identify plausible factors that could lead to such a result.

The report called for a more agile and holistic risk strategy, combining data-driven analysis with qualitative insight. It urged risk managers to integrate environmental, social and governance (ESG) risks into core frameworks, use scenario planning to build geopolitical and economic resilience, and strike a better balance between embracing technology and managing cyber and compliance threats. Crucially, PwC called for annual megathreat reviews at board level to ensure firms remain ahead of accelerating global risks.

“We are publishing this report to encourage financial institutions to engage in deep reflections and rethink how they prepare for increasingly complex and systemic risks. The scale and speed of today’s threats demand more than traditional risk models. Firms need to challenge assumptions, act before crises strike and build resilience through forward-looking, practical strategies and reverse stress-testing. Preparing for uncertainty must now be a core part of doing business, not a reaction after the fact,” said Partner and Regulatory, Risk and Compliance Leader at PwC Luxembourg, Benjamin Gauthier.