Six in 10 organizations have already taken measures to manage market risks.
Summary: Commodity prices shocks and real estate volatility have pushed market risks into the top 10 for the first time. Companies are managing it primarily through active monitoring.
Market risks are a new entrant to the risk radar for 2011, combining challenges such as real estate market volatility, commodity price volatility, and speculative financial attacks which have become threats to many sectors in the wake of the global financial crisis.
Averaging across all the sectors covered, respondents expect the impact of such risks to continue to rise as 2013 approaches.
The panelists we interviewed expressed concerns about many aspects of market volatility in the wake of the financial crisis. However, in our global survey, concerns tended to be oriented more toward risks occasioned by government intervention in markets.
Such concerns echo themes previously discussed in regard to regulation and compliance and cost cutting risks, and discussed in the next section in relation to the expansion of government's role.
Although market risks are commonly mentioned by executives across all sectors, they are of particular concern to retail, oil and gas, and banking, which likely reflects exposure to real estate, commodity and financial markets respectively.
By contrast, organizations in the health care and public administration sectors reported that market risk was less of a threat, although they were more likely to report that their ability to manage the risk was restricted by the possibility of government intervention.
Looking to 2013, both banking and oil and gas respondents, on average, felt the risk would fall in importance, perhaps reflecting optimism that recent volatility in financial and commodity markets would be a temporary phenomenon.
Managing the risk
Our survey indicates substantial variation from sector to sector in strategies for managing market risks, although the two most commonly reported strategies both involve monitoring programs. Other risk mitigation strategies include diversification and hedging of currency risks.
- Banking respondents were among the most likely to report that measures to respond to market risks had been taken, with close to 70% indicating this to be the case.
- Public administration respondents were most likely to indicate they had been unable to formulate an effective response.
The survey revealed wide geographical variation in management of market risk, although the reasons for this variation were somewhat unclear.
- Overall, 6 in 10 organizations had already taken measures to manage market risks, although this figure was markedly lower in China, and ranged within Europe from41% in Sweden to 81% in Germany.
- Respondents based in Russia and China appeared particularly likely to indicate that measures to respond to market risks are planned but have not yet been undertaken.
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