Post Crisis, Finance Pros Fear Market, Liquidity Risk

Market, liquidity, energy, and commodity risks seen as biggest threats; Interest rate risk and credit risk seen as most common

News provided by

Association for Financial Professionals

Apr 13, 2010, 11:48 ET

WASHINGTON, April 13 /PRNewswire/ -- Market risk and liquidity risk are the most significant threats an organization can face today, followed by energy and commodity risk, according to a new survey of finance professionals. The most common business threats are interest rate and credit risk.

The survey, conducted by the Association for Financial Professionals, generated responses from over 200 senior-level corporate finance and treasury personnel working in mid-market corporations predominately in North America.

"Our survey reinforces the two most common themes we have learned from this financial crisis," said Brian Kalish, AFP's finance practice lead. "First is the paramount importance of liquidity and second is that by the time a crisis strikes, it's too late to start preparing for it."

Market or liquidity risk can call into question the financial viability of an organization. They can destroy an organization with a speed that one typically does not see with interest rate and credit risk. In addition, there are no easy, off-the-shelf instruments to minimize their impact.

The survey also found that organizations hedge financial risks to reduce variability in cash flows and/or earnings and to achieve the lowest expense outlay. Cost and comfort with a particular instrument were the key determinants in picking a hedge.

Meanwhile, some organizations are not fully hedging their known financial risks, due to hedge accounting concerns. To avoid potential accounting impacts, 55 percent of organizations surveyed said they are making sub-optimal economic decisions. Given the potential for further regulatory change, almost 40 percent of organizations surveyed said that they would reduce or change their hedging strategies if they were unable to apply hedge accounting treatment. In other words, new accounting rules intended to reduce risk might inadvertently be increasing it.

KEY FINDINGS

Among the key results from the 2010 AFP Financial Risk Survey:

82 percent of organizations reported exposure to interest rate risk.
31 percent consider it a significant risk.
45 percent hedge this exposure.
72 percent use over-the-counter (OTC) swaps.
79 percent said transaction cost is a factor.

72 percent of organizations reported exposure to credit risk.

38 percent consider it a significant risk.
45 percent hedge this exposure.
49 percent use credit insurance.
72 percent said transaction cost is a factor.

64 percent of organizations reported having an exposure to liquidity risk.

53 percent consider it a significant risk.
57 percent hedge this exposure.

52 percent of organizations reported exposure to market risk.

64 percent consider it a significant risk.
61 percent hedge this exposure.

51 percent of organizations reported an exposure to foreign exchange risk.

40 percent consider it a significant risk.
72 percent hedge this exposure.
81 percent use OTC forwards.
72 percent said transaction cost is a factor.

ABOUT THE SURVEY

In November 2009, AFP sent a 43-question survey to corporate practitioner members of the association and received 226 responses -- approximately 8 percent. AFP is releasing results today.

Listen to an interview with Brian Kalish on significance of the survey findings: www.afponline.org/riskpodcast

Read the full report: www.afponline.org/research

ABOUT AFP® (www.afponline.org/about)

The Association for Financial Professionals (AFP) serves a network of more than 16,000 treasury and finance professionals. Headquartered outside Washington, DC, AFP provides members with news, economic research and data on the evolving world of treasury and finance, as well as treasury certification programs, networking events, financial analytical tools, training, and public policy representation to legislators and regulators. AFP is the daily resource for treasury and finance professionals.

AFP's global reach extends to over 150,000 treasury and financial professionals worldwide, including AFP of Canada; London-based gtnews, an on-line resource for the treasury and finance community; and bobsguide, a financial IT solutions network.

SOURCE Association for Financial Professionals