A majority of bankers, insurers and asset managers, as well as finance executives at non-financial companies, consider their organizations to be vulnerable to exceptional or sudden swings in volatility, according to a global survey conducted by the Economist Intelligence Unit for SunGard.
Following the 2008 financial crisis, regulators have made understanding and managing volatility risk a top priority. For example, the U.S. Federal Reserve and the European Banking Authority have introduced “stress tests” to analyze whether large bank holding companies and banks, respectively, would have sufficient capital in times of severe economic and financial stress, as well as to analyze risk across the financial system.
This scrutiny, in addition to other regulatory changes, economic uncertainty and weak market conditions, are creating concern about volatility risk in the business or the economic environment, as indicated by executives who responded to this survey, particularly those in North America and Western Europe.
The key findings of the survey include:
- More than two in five respondents feel their firms are under-investing in risk management tools that could help them cope with volatility.
- Despite regulatory pressure and a greater awareness of risk, more than half of the respondents say their company conducts stress tests or scenario analysis to check their ability to cope with volatility just once a year or every six months at best. That means the majority of organizations surveyed are exposed to fast-moving developments.
- Only 17 percent of respondents say their company proactively takes measures to protect their clients from volatility risk and nearly one in three say they either wait for instruction from their clients, or they do not have any system in place to specifically shield their clients.
- Since the onset of the crisis, chief financial officers (CFOs) and chief risk officers (CROs) have become more accountable for coping with volatility. This is particularly true in North America, where over a third of respondents say their CFO is currently accountable for managing volatility at their company.
Abhik Sen, managing editor at the Economist Intelligence Unit, said, “What is most striking about this survey is that despite the obvious need for improvements in risk management in today's challenging economic and business environment, a majority of firms around the world do not seem to be conducting stress tests as frequently as they should be. Companies should also be worried that only two in five senior executives surveyed feel confident that the business model of their employers can cope with sharp swings in volatility."
Jeffrey Wallis, managing partner at SunGard Global Services, said, “The SunGard-EIU survey shows that many organizations have taken steps to better handle volatility risk, such as increasing shared accountability for it internally. However, it also appears that many firms remain vulnerable, whether through irregular or non-existent exposure monitoring, inadequate investment or insufficiently robust business models. Overall, our findings suggest that there is still much to learn about the causes of volatility risk and the best methods for controlling it.”
The survey polled more than 500 executives at financial and non-financial firms around the world with influence over or responsibility for risk or compliance.