As some market experts report hearing the distant, but undoubtedly chilling, growls of an approaching global downturn, we ask how much risk managers can really do to protect their businesses from being savaged.
It is now more than 11 years since Lehman Brothers bankers packed their belongings into cardboard boxes and left their Wall Street offices for the last time.
September 2008 saw the collapse of the US investment banking institution that marked the onset of the Global Financial Crisis and Great Recession, the worst global economic downturn since the Great Depression of 1929.
From Singapore to Sydney and London to Lisbon, no global economy was immune from the effects of the global financial crisis, sparked by the collapse of the US subprime mortgage market.
“No global economy was immune from the effects of the global financial crisis”
Credit was withdrawn overnight, and global economies turned to monetary and fiscal stimuli to prevent a full-scale economic collapse.
Banking crises in Iceland, Ireland, Portugal and Britain echoed the turmoil seen in the US, as governments grappled with falling house prices and damaged consumer confidence.
Eleven years on from the biggest economic crisis in our lifetimes, there are fears another global downturn could be around the corner.
Months ago, in the US, an inverted bond yield curve, a key indicator for an imminent recession, caused market experts to ring the alarm.
The yield curve has since returned to normal, but recent market activity indicates investors are skittish about the prospect of the global economy. There is a looming feeling we are approaching the end of the upturn.
FOREWARNED IS FOREARMED
As risk managers across the globe watch financial markets for the next big risk indicators, how can risk teams prepare their organisation for a global economic downturn?
What role should risk managers play in protecting their business, and can anything really be done? StrategicRisk spoke with some of the world’s leading risk managers to get their views on how to tackle recession risk.
Eamonn Cunningham, an independent risk consultant, was the chief risk officer for shopping mall group Westfield when the 2008 crisis hit. With operations in the US, UK and Australasia, the company was directly impacted by reduced spending as consumers tightened their belts in the wake of the crisis.
“You have to check the facts and not assume.”
Cunningham, says it can be difficult to predict the outcome for your business, and organisations should consider all eventualities when considering the impact of a recession.
He said: “In the retail landscape, you would think customers would have reduced spending on luxury goods, and the more expensive stuff. You would expect discount brands to be more resilient. However, the opposite happened, and the high-end proved more resilient, at least in the initial period after the recession hit. The message here is, you have to check the facts and not assume.”
He says that risk managers can help guard their company against the risk of recession by having a “robust” enterprise risk management (ERM) system in place, that needs to cover all areas of enterprise activity, at the strategic decision-making level.
He explains: “If you’re just employing ERM for the operational stuff, you’re going to be caught short if we have a major market-changing event like the 2008 recession.”
He argues risk managers should regularly test their ERM processes to ensure they can withstand a major economic event.
”If you’re just employing ERM for the operational stuff, you’re going to be caught short if we have a major market-changing event”
He says: “You might have a robust ERM system, and it might go from boardroom to factory floor, but unless you’re stress testing it, and have a regular regime of robust scenario planning, you’re not testing the ERM system to ensure it will deliver as intended.
“What we found was, testing needs to be sophisticated so that it also considers the impact of multiple factors that may cause an adverse impact. You have to look at areas that are highly correlated. So ‘A’ might have an impact of 1, ‘B’ might have an impact of 1, but together they might have an impact of 3.”
Cunningham believes risk managers can help their organisations guard against the risk of recession by highlighting the potential effects and helping companies consider strategic changes, such as which markets to remain in, which products to sell or which currencies to move into.
He explains: “Some [risk managers] may feel they have no ability to influence the outcome, but I always refer to the old adage, which is, ‘forewarned is forearmed’. If you’ve done the homework and identified it as an issue, and get that message through, that is something.”
“If it is on the register and decision-makers see it as a risk, they might think they can impact it by 2% or 5%. It’s amazing what degree of control you can have. You won’t be able to influence macroeconomic policy, but there are things you can do.”
”Testing needs to be sophisticated so that it also considers the impact of multiple factors that may cause an adverse impact”
He says it is important for risk teams to position themselves so that when they speak, all the relevant people listen. And that risk managers should not underestimate the impact they can have in preparing for major global events.
He concludes: “You may be coming to the table with a dire warning, so you need to come with facts and back up what you say.
“Any risk manager worth their salt shouldn’t just throw their hands up and say there’s nothing we can do about it. It’s even worse to leave it off your company’s risk register. You must put it on.
“There must be a grown-up debate on what can be done, even if you don’t think anything can be done. Don’t accept the premise there’s zero that can be done. Knowledge is power, and forewarning is useful.”
GO BEYOND YOUR IMAGINATION
Danny Wong, the founder of GOAT Risk Solutions, a UK-based risk management business, says the UK struggled to recover during the Great Recession.
He explains: “Although the credit crunch of 2007–09 originated in the US, the impact in the UK was far-reaching. The collapse of Northern Rock, the government bailout of HBOS, liquidity in the markets collapsed, equity market plummeted, interest rates dropped, and governments pumped money into the financial system through quantitative easing, house prices collapsed, millions of jobs were lost, and the value of sterling has never recovered – all indicate its lasting effects.”
He says macro-economic risks are ones that could have a significant impact on the business but are almost entirely out of a business’ control.
He adds: “As a risk manager, we can still help the business walk through the scenario, ensuring that we are as resilient to economic shocks as possible. This might mean introducing policies to hold cash, reduce investment capital and spending, cut costs, reduce financial commitments and secure access to credit.
“The important thing is to monitor and manage cashflows, communicate expectations, have plans of different levers to pull and at what point. These aspects are all wholly within our control.”
”As a risk manager, we can still help the business walk through the scenario, ensuring that we are as resilient to economic shocks as possible”
Wong believes Brexit poses the biggest risk to a recession in his home market.
He explains: “In the UK, the most obvious trigger event will be Brexit, which has been looming since the 2016 referendum. Brexit could have a severe direct effect on the UK and European economies, which could trigger the next global recession.”
Wong says risk managers learned a valuable lesson in the Great Recession: that events could be longer and have more far-reaching effects than imaginable.
He concluded: “We really shouldn’t have been surprised if we stepped away from it and used some common sense – we should now be able to see bubbles from a mile away. We must not be complacent.
“We need to pay attention to the systemic or macro-risks. It’s not just relative to your competitors; it could permanently affect entire sectors. It will happen again.”