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Callum McCarthy |
The Financial Services Authority (FSA) yesterday published its 2007 Financial Risk Outlook (FRO). This is designed to raise awareness of the priority risks which the FSA believes it, together with providers and users of financial services, should consider. The FRO called on firms to improve the stress testing of their businesses against the environmental risks that could happen in the next 18 months.
The FSA observed that, although there were no current global environmental high impact issues, things are becoming more unsettled and risks such as global warming and influenza epidemics were increasing in probability. Other key issues given were "the increasing geopolitical risks, increasingly complex financial markets and the combination of low volatility of asset prices, low market pricing of risk and stronger correlations between the prices of different classes of asset." It is considered that the likelihood and impact of major shocks to the system were greater now than two or three years ago.
Callum McCarthy, Chairman of the FSA said "While the central case is one of continued economic and financial stability, the various trends in place now mean that were something to go wrong it would have a much bigger impact than two or three years ago. This has implications for both providers and consumers of financial services."
A recent FSA review on stress testing found that, while good work was being done, some firms could be underestimating the probability of severe events and that "firms should not overestimate their ability to take action in an effective and timely manner".
McCarthy urged all firms to consider the risks outlined in the FRO and to plan accordingly. He said "Stress testing and scenario analysis enable firms to assess and mitigate the risks that face them. It is important that firms use this period of relative stability to identify risks that could arise in less benign times. Our work shows that many firms still need to do more to develop their stress testing and to use more challenging scenarios. Similarly, consumers should consider how they would manage their existing debt in the event of any disturbance to the present favourable economic circumstances."
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