Market, credit, and liquidity risk are key concerns for financial institutions as 2023 approaches, according to a new global survey conducted by Bloomberg.
The survey polled over 200 senior risk executives during Bloomberg events on ‘Managing Risk in a New Era of Uncertainty’ held in nine locations globally between September and November 2022.
Breaking it down, market risk topped the list at 39% followed by credit risk, 31% and liquidity risk, 24%.
The two areas have become in sharper focus due to interest rate hikes, higher inflation, increased volatility, and widening spreads.
In terms of dealing with market events over the last year, respondents cited using point-in-time factors including credit default swaps and news, which are quick to capture the impact of market changes but are noisy.
It found that more traditional credit risk indicators, which use slower moving data to produce through-the-cycle credit measures, included credit ratings and company fundamentals..
Meanwhile, 13% of respondents relied on a combination of these indicators through the development of their own internal credit scores.
“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.”
As to liquidity risks, 34% said implementing additional scenario analysis was the primary update to their liquidity risk management frameworks.
For 29%, there was no significant changes to liquidity risk management frameworks, indicating firms may be riding out the storm and waiting to see how their current systems perform.
“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.”
Longer term climate risks are lower on the agenda but remain a concern since an earlier Bloomberg survey was conducted in May, with just 5% of respondents saying this was a key concern.
However, the vast majority of firms or 90% are making progress incorporating climate risk into their analysis with just 10% saying they have no plans to integrate.
