Global interconnectedness brings new challenges to good financial risk management

Mistakes will continue to test risk mitigation models: KPMG

Financial markets face new threats to risk management created by increasing market interconnectedness and rapid information dissemination. These threats have been heightened by the speed at which decision-making is now required and increasingly rapid global capital movements. This was the view to emerge from a Global Risk Management forum hosted by Accounting and Advisory firm KPMG today.

“Although it is assumed that we are relatively immune to the shock rattling the global economy, we have had unparalleled levels of international trade in recent times which are characterised by a more relaxed governmental approach to intervention and supervision,” said KPMG partner, Dr Andries Terblanché.

This has led to massive shifts in corporate global and macro-economic risk profiles. Most existing risk management and monitoring tools and theories are schooled in efficient market theory, which fails to make sufficient allowance for mistakes.

“With our current level of interconnectedness, the risk of mistakes occurring will be substantially higher. We can therefore no longer place undue reliance on mathematical risk models to ‘safeguard’ us in a future, interconnected world. What we need is a deeper, more concentrated approach to risk management.

“Risk management for the future requires extensive, deep-dive scenario analyses to more fully explore financial organisations’ risk appetites, profiles, vulnerability and mitigation processes. Such scenario analyses need to draw from and link into international research on global risks and should then be refined into industry and entity specific scenarios.”

Terblanché cautions that mitigation of future risk requires appropriate, but not excessive, regulation. Such regulation should limit the opportunity for inter- and intra-market arbitrage. The development and introduction of such regulations require an international approach and global coordination.

“Future regulation should also avoid populism, should be specific to the different financial services sectors and should pay specific attention to leverage within each sector – akin to the Taylor Rule for central banks, he said.

“In addition, we need greater empowerment of global enforcement and facilitation institutions and a clear re-articulation of their roles. These institutions, whose existing mandates emerged mainly in the post second world war context, require new, modernised mandates and rebalanced memberships to better reflect the current global order and emerging challenges.”

Turning to South Africa, Terblanché maintains that the country “arguably has been more sheltered than other countries in the world” from the global crisis, but could still face exogenous risks arising out of an increasing trade deficit and declining demand from players such as China. Evolving global circumstances, however, present the opportunity for South Africa’s already much respected voice in the financial world to get stronger.

“We are facing a global problem, which requires a global solution,” he says and points to the pressure on the upcoming G20 summit which he compares to the London Summit of 1933.

“As was the need then, this summit will require extraordinary leadership - particularly from the US - to achieve what is required. Yet we have no alternative: if we fail at that level, we will be compelled to seek solutions at a more regional or national level.

“This is fraught with peril. In trying to save individual countries - given our unparalleled global interconnectivity - we will end up endangering others,” warns Terblanché.