The top 10 business risks for executives and multinational companies

14 November 2017 Consultancy.uk

High unemployment is one of the top most cited risks among business leaders globally, according to a new report. Fiscal crises and failing national governments take the number two and three spots respectively. In the UK, fiscal risks and an asset bubble come in joint first place, followed by cybersecurity. 

In the latest edition of the World Economic Forum’s Global Corporate Risk study, which is developed by risk specialists Marsh & McLennan Companies (a consulting firm) and Zurich Insurance Group (an insurance firm), sentiment around risks to global businesses was elicited from 12,400+ executives and senior professionals in 136 countries. The report aims at providing insight into what, on average, respondents thought to be the greatest risk within their own country in the next ten years.

Top ten

Globally, high unemployment was noted as the most concerning risk in the next ten years. Concerns are apparent on a range of fronts, from already high unemployment levels across various regions, particularly for young people, as well as changes to the labour market that see increased automation reduce the demand for low- and even high- skilled labour in various sectors.

The concern from businesses at rises in unemployment show the paradox many consumer-oriented companies in particular find themselves in amid the rise of automation. On the one hand, international corporations see AI and automation technology as an opportunity to downsize their collective staff, and consolidate profit margins in the process. On the other hand, the fewer people in work there are, the more consumers there are with limited spending power.
The top 10 business risks for executives and multinational companies

Other top concerns for businesses included a fiscal crisis in second, followed by the failure of national governance. Changing dynamics around the energy market may give rise to a shock in price – another key fear –although the energy market may itself become unstable as too much emphasis is placed on energy-types, such as fossil fuels, that are incompatible with future stability. Large scale cyberattacks have increased their place in the top 10 by three spots, following a number of global level incidents.

Terrorist attacks have, meanwhile, fallen in the ranking by two places, in similar vain to energy shock. For the most part, the ranking has stayed relatively stable in last year, with one place increases for fiscal crisis, national governance failure and interstate/regional conflict (the Catalonia independence vote recently reminded the world how even modern EU states are not excluded from this).

Regional risks

Regionally, some considerable differences in the top five were noted by the report. North American respondents are the most concerned with large cyberattacks – which have recently hit top companies such as Equifax and Deloitte – along with terrorist attacks, an asset bubble, a fiscal crisis or a lack of climate change adaption. Other issues weigh heavy on business leaders’ minds in South America, including national governance failure, high unemployment, social instability, a fiscal crisis or critical infrastructure shortfalls. The region remains mired in political scandals, which, with the following two risks, may give rise to a host of long-term risks for the region. 

Top regional risks.In South Asia, concerns among businesses are largely focused on high unemployment, coupled with urban planning failures and critical infrastructure shortfalls, particularly in terms of water access. In East Asia and the Pacific, a large cyberattack is the number one threat, followed by asset bubbles and fiscal crises’. In the Middle East and North Africa, concern around high unemployment and energy price shocks continue to reign.

European risks

In terms of country specific risks in Europe, the differences between regions are substantial. In the UK, fiscal risks and an asset bubble come in joint first place among those surveyed. A large-scale cyberattack (the NHS was recently impacted by the WannaCry attack) takes the number three spot. The failure of financial institutions, meanwhile, ranks fourth, while a terrorism attack comes in fifth. Unemployment took a back seat to these risks, partially due to the national unemployment rate currently being reported as having fallen unexpectedly to a 42-year low of 4.6%, according to the Office for National Statistics. In the US, concern around terrorist attacks takes the number one spot, followed by large cyberattacks, the misuse of technology, an energy price shock and data fraud/theft.Top five key European area risksOn mainland Europe, other concerns were noted. In Germany for instance, large cyberattacks and terrorist attacks come in the number one and two spots respectively. In France, high unemployment is number one, followed by terrorist attacks. Italian and Spanish businesses, meanwhile, noted financial institution failure and high unemployment, as their respective number one risk concerns.

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An 8-step framework for banks to prepare for FRTB changes

02 April 2019 Consultancy.uk

With FRTB expected to come into force in 2022, it is critical that banks implementing necessary changes remain on track for their compliance timelines. Whether a company is aiming for the mandatory Standardised Approach (SA) or the voluntary Internal Models Approach (IMA), the programs often represent a significant investment, requiring process, systems and cultural change. 

Drawing from its experience in helping banks meet the milestone set in their compliance timelines, Capco – a management and technology consultancy for the financial services industry – has developed an eight-point prioritisation framework for FRTB preparation and implementation. Natasha Leigh Giles, a Managing Principal at the consultancy, outlines the main dimensions of the framework: 

Prioritisation framework for FRTB

1. Front office operating model

For those who have already implemented the Volcker rule, the desks are well defined with monitoring and governance frameworks. However, for companies that have not been required to adhere to the U.S. regulation, there may be additional work involved in implementing desk-level controls as required under FRTB. The trading desk structure is especially important for banks planning to implement IMA, as this regime is applied at the desk level and requires that the full flow of the selected desk is able to pass the IMA requirements (including the modelability test for the risk factors). Key business decisions may be required if a desk trades complex products that are more aligned for SA treatment. 

2. Product scope

In order to reach the IMA status, products are required to be supported with additional data sets including historical market and reference data as well as risk factor pricing evidence. The opportunity for 2019 lies in refining the assessment on the feasibility of each product type to ensure a clear scope is agreed for the IMA environment. If the challenges are too complex or costly to overcome, such as access to historical market data, availability of price verification for the risk factors or significant enhancements to support computational capacities, then these products should be scoped out of the IMA program as soon as possible in order to save time and effort on continuing analysis. 

3. Client & trading activities

There is no need to wait until the FRTB implementation timeframe to undertake a holistic review of client and trading profitability – including the capital impacts. For example, running training and awareness campaigns within the front office can help the traders to understand the impacts of their activities and encourage changes in the way that they trade. By considering this holistically as a business and operational change, it can help keep the focus and resources on the primary (profitable) business in preparation for the compliance deadline. 

4. Internal controls

Methodology, reporting, auditability, and process governance for internal controls also need to be monitored in detail. We recommend having clearly defined processes accompanied by effective training across front-to-back office. For some banks, it will be beneficial to audit existing capital adequacy processes to ensure that findings are highlighted in advance of the implementation timeline and the appropriate focus is achieved within senior management.

5. Data & metrics

Financial institutions need to consider their overarching governance and ongoing management for the data (including ownership, quality control, golden source storage solutions, etc.) and the ongoing control framework for ensuring the data remains accurate and relevant for capital adequacy modeling. If there has not been a data lineage exercise already applied, this is a great opportunity to deliver business benefit, even in 2019. By creating agreed definitions, preferred sources, ownership and workflows for managing data quality, the benefits of more accurate data can already be applied to existing capital calculation models. 

Framework for FRTB

6. Model management & validation framework

In preparation for the FRTB regime, an opportunity for 2019 is to understand if there are gaps or control concerns to manage immediately. Model enhancements across SA and IMA will need to be productionized for output accuracy and refinement, however, these need to be maintained alongside existing Basel 2.5 BAU models and other concurrent changes e.g. LIBOR Transition. Business process optimization, testing environments and automation tools, documentation and model validation can all be reviewed for immediate benefits and prepare the process for a smooth implementation of the future FRTB models. 

7. Technology platform & testing environments

With regards to technology planning, the opportunity in 2019 is focusing on gaining agreement of the front-to-back FRTB future state architecture including the use of vendors as applicable. By ensuring a disciplined focus upon design and solution definition across all requirements, it provides a clear baseline for implementation planning and scheduling. Establishing a technology architecture which allows for FRTB data feeds, model enhancements, control definitions and accurate capital calculation outputs will provide the program with essential data and metrics needed for decision making. 

8. Leverging synergies

Once a baseline plan has been established, it is possible to identify synergies across other programs – such as the SA-CCR (Standardized Approach for Counterparty Credit Risk) or the IMM (Internal Models Methodology) – that could deliver overlapping benefits at reduced effort. Understanding requirements, defining the future state architecture, and implementing the change in a complex environment requires a mix of strategic principles and program management. Therefore, we consider it an opportunity for 2019 to take a centralized approach for data lineage and requirements gathering as this would be beneficial for optimizing capital costs across both the market and credit risk environment.

Conclusion

By considering each topic strategically in 2019, benefits such as data quality enhancements, strengthened internal controls and flexible test environments will not only bring immediate business value, but also set a solid foundation for a comprehensive FRTB implementation in the years to come. 

For more information on Capco’s model and the its approach in helping banks plan for FRTB, download the full whitepaper on the firm’s website.