Liquidity Risk Still Biggest Concern says gtnews Treasury Risk Survey 2013

The gtnews Treasury Risk Survey 2013, carried out in collaboration with the Zanders consultancy in April, identified other top 10 risk concerns for treasury managers and heads of treasury – the most common job title of the 327 respondents – as being systems and reputational risk, both identified by 65%, fraud (58%) and country/sovereign risk (54%). The latter finding reflects the on-going concerns about the eurozone and, more generally, the 2013 results highlight the expanding role of risk in corporations. Commodity risk, cited by 51% of respondents, completed the top 10. 

Interestingly, despite the eurozone crisis and stagnant or negative growth across many European countries, corporate treasurers in the European region were more sanguine than their counterparts in North America, with ‘only’ 74% of respondents worrying about liquidity risk as opposed to 86% of Canadian or US treasurers. The worries about cash balances and funding of the North American participants pushed the overall liquidity concern figure across all respondents up to 78%, with the findings suggesting that perhaps the maintenance of large cash reserves may yet go on for some time. Other regional differences can be seen in the chart below. 

Figure 1: Significant or Very Significant Corporate Risks Identified by Treasurers. 

gtnews Treasury Risk Survey Fig1

Source: gtnews Treasury Risk Survey 2013.

The fourth annual gtnews Treasury Risk Survey 2013 illustrates how traditional financial risks, such as liquidity, credit and market risks – principally FX and interest rates in the latter category – are not the only worries for corporate treasurers these days. While they are, of course, still vital to efficient cash management, the high scores of the other non-traditional categories of operational risk and business risk, which covers regulation, fraud, system and country risk, show that the role and coverage of treasury risk management is expanding.  

Enterprise-wide Risk Management

Survey partners Zanders speculate that the second-placed score of regulation as one of the prime risk concerns for all corporate treasurers is caused by the raft of changes since the 2008 financial crisis. The move up of this non-cash management concern is reflective of a trend towards a more integrated and ‘holistic’ enterprise-wide risk management (ERM) approach with treasury and other departments at businesses expected to communicate and identify all threats to a firm on a much more comprehensive and proactive basis. 

Treasurers are increasingly expected to contribute to or run non-financial risk programmes now, as well as their traditional FX, liquidity and interest rate risk hedging and oversight procedures. For instance, in 43% of surveyed companies the treasury department manages insurance risk and fraud risk; 39% of treasury departments are responsible for regulatory risk; and 28% for pensions, illustrating the expanding risk duties of treasurers. 

Figure 2: The Categories of Risk Managed by Treasurers.

gtnews Treasury Risk Survey 2013 Fig2

Source: gtnews Treasury Risk Survey 2013.

With new accounting rules such as the updated International Financial Reporting Standards (IFRS) 9, and the financial market stipulations outlined in Dodd-Frank in the US and the European Market Infrastructure Regulation (EMIR), it is not surprising that regulatory risk concerns – away from core concerns about funding, repatriating cash and traditional treasury risk duties – are rising up the list of priorities. Interestingly, despite the high score for regulation, given by treasurers when assessing the risk that new regulation poses to their companies, the duty to actually do something about it falls to less than half of them: a discrepancy between policy and practice perhaps exists here, or at the least a need to involve other departments in a holistic approach.  

Zanders believes that corporations should consider using a five-step corporate risk management framework (see figure 3 below) to cope with this new demand for an integrated enterprise-wide, holistic risk management approach.  

Figure 3: Five-step Corporate Risk Management Framework.

gtnews Treasury Risk Survey 2013 Fig3

Source: gtnews Treasury Risk Survey 2013.

As shown in figure 3, the corporate risk management framework consists of five steps starting with “identification” in which the key exposures of the company are identified by estimating the impact of each exposure and the probability that it will occur. The second step is “quantification”, calculating the impact of the risks on the performance of a company by using a combination of risk quantification techniques. Step three is “strategy and policy”: after identifying the key exposures and calculating the impact of the risks, a risk management strategy can be defined and formalised in a policy document. The fourth step is defining the “processes” to execute the policy. The fifth and last step is the “execution” of the risk policy and procedures, often by treasurers.  

Companies can use such a framework, claim survey partners Zanders in their conclusions, to create and evaluate the success or otherwise of their enterprise-wide risk management (ERM) approach. The emphasis is on risk strategy and policy, particularly as these relate to changing risk attitudes, says Zanders. Reporting to the board should be expected and a large multinational corporation (MNC) treasury may be required to take on this managerial duty, while still running everyday risk checks.  

The ERM approach appears to be more popular and advanced in North America at the moment, with 56% of treasuries there responsible for managing insurance risk compared to just 35% in Europe (refer to figure 2). Another substantial difference is seen for fraud risk (49% v 38% in Europe) and for pensions risk the differential is 40% v 21%. The fact that North American treasuries currently manage more risk categories than European ones suggests that companies there are applying more of an ERM approach.  





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