In light of the variety of risks corporate treasury had to face in 2022, and given that the global economy is headed for a recession, strengthening risk intelligence and management is expected to be a focal area for finance leaders and corporate treasurers over the next 12 months. They will need to anticipate and mitigate dynamic risks that may come to the fore and threaten their organizations’ strategic operations and initiatives.
Among the different types of risks that corporate treasurers will have to navigate this year, market, credit and liquidity are the top risk concerns, as per a new global survey conducted by Bloomberg.
The survey, titled Bloomberg Risk Analytics Survey 2022, polled over 200 senior risk executives during Bloomberg’s event series Managing Risk in a New Era of Uncertainty’ held in nine locations globally between September and November 2022.
Key risk concerns for 2023
The survey findings reveal market risk as the leading risk concern of 2023 for 39% of the respondents. This was closely followed by credit risk (31%) and liquidity risk (24%) – two primary concern areas that have increased in focus over the last 12 months, “Driven by interest rate hikes, higher inflation, increased volatility, and widening spreads”, the survey explains.
Long-term climate risks are lower on the agenda for surveyed respondents’ businesses, but they remain a concern since an earlier Bloomberg survey was conducted in May 2022. Just 5% of risk professionals said this was a key concern, but “the vast majority of firms (90%) are making progress incorporating climate risk into their analysis with just 10% saying they have no plans to integrate”, states the Bloomberg survey.
Most useful credit risk indicators for managing market events
Source: Bloomberg Risk Analytics Survey 2022
“Respondents cited using point-in-time factors including credit default swaps (23%) and news (14%), which are quick to capture the impact of market changes but are noisy”, as the most useful credit risk indicators for managing market events over the last year. Credit ratings (13%) and company fundamentals (11%), considered the more traditional credit risk indicators, “which use slower moving data to produce through-the-cycle credit measures”, were the other useful sources, while 13% of respondents relied on a combination of these indicators to develop their own internal credit scores to mitigate credit risk.
“To proactively manage credit risk, firms need a surveillance framework across a broad range of factors, and technology has a key role to play—especially when it comes to turning noisy market factors into meaningful signals”, said Zane Van Dusen, Global Head of Risk & Investment Analytics Products at Bloomberg. “Market participants are usually aware of potential credit issues ahead of any rating changes. With the right technology and data, risk managers can anticipate downgrades and credit defaults at-scale.”
Updates to liquidity risk management frameworks
Source: Bloomberg Risk Analytics Survey 2022
Given that liquidity risk features among the top risk concerns for 2023, the survey respondents, when asked how their liquidity risk management frameworks have changed, said, “Implementing additional scenario analysis (34%)” was the primary update their companies made to their liquidity risk frameworks. The next most common response was that no significant changes had been made to liquidity risk management frameworks (29%), indicating that “Firms may be riding out the storm and waiting to see how their current systems perform”, the survey noted.
“While liquidity risk ranked as the third concern at the time of this survey, it has quickly become a larger priority for US asset managers”, said Van Dusen. “Proposed changes to SEC Rule 22e-4 have brought concerns about liquidity risk back to the fore as firms try to assess the impact on the liquidity profile of their funds. We expect this to be a larger focus throughout 2023.”
Finance chiefs and treasurers have faced a multitude of risks and challenges over the past two years. The markets in 2022 were characterised by a lot more pain than gain. In addition, debt became far more expensive, and corporate borrowers run the risk that it may translate to higher cost of capital. Furthermore, tightening financial conditions in the face of a looming recession may result in reduced revenue, weakened profitability and slower cash flow. This will warrant mitigation of market, credit and liquidity risks that can adversely impact an organization’s stability and growth.
Focusing on risk management – particularly market, credit and liquidity risk – and spending more time to manage these risks over the next 12 months will help corporate treasury grapple with global economic and political upheavals, including market volatility, rising interest rates and growing debt burdens.
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