A majority of bankers, insurers and asset managers, as well as finance executives at non-financial companies, consider their organisations to be vulnerable to exceptional or sudden swings in volatility, according to a global survey conducted by the Economist Intelligence Unit.

The combination of economic uncertainty, weak market conditions and major changes in the regulatory environment is making executives, particularly those in North America and Western Europe, wary about volatility risk. Apart from the firms themselves, their clients too appear to be at risk: only 17 per cent of respondents in the survey say their company regularly checks their clients’ exposure to volatility risk and takes action to protect them. 

Key findings from the survey include the following:

• Many firms around the world may be vulnerable to sudden swings in volatility. More than half the respondents in our survey say their company conducts stress tests or scenario analysis to check their ability to cope with volatility just once a year or once in six months at best, leaving most organisations that do not conduct frequent stress tests exposed to fast-moving developments. Furthermore, a significant number of the firms surveyed seem to be under-investing in their ability to cope with volatility: more than two in five respondents (41 per cent) in our survey think their company has not allocated adequate resources to key risk management tools such as research, forecasting and data analytics.
• A significant number of organisations may not have business models robust enough to cope with unexpected levels of volatility. On the whole, four in ten executives express confidence in their company's business model but a significant proportion of financial firms do not appear to have a strategy in place to protect their clients from volatility risk. Forty three per cent of respondents say their company regularly checks their clients’ exposure to volatility risk and advises them on risk mitigation. A further 17 per cent say they proactively take measures to protect their clients from volatility risk. But nearly a third of respondents say they either wait for instruction from their clients, or they do not have any system in place to specifically shield their clients.
• Compared to their peers in other regions, executives in North America are much less confident about the ability of their organisations to cope with volatility risk. Just under one half of respondents from the US and Canada think their company is either inadequately prepared or not prepared at all to deal with the consequences of unpredictable changes in the operating environment. Less than half of North American respondents (47 per cent) think their company’s business model is good enough to cope with unexpected level of volatility and 53 per cent say it is hindering their company’s ability to plan and invest for the long term. In addition, one in two respondents from this region believe their company is not investing enough in risk management.
• Business executives expect volatility risk to have a substantial impact on their firm's financial performance over the next three years. Views vary slightly from region to region but 49 per cent of respondents in Asia Pacific and 44 per cent in Europe expect to encounter a high level of volatility in their company’s profitability, while 52 per cent of North American respondents think the shareholder value of their companies, rather than profit, sales, workforce hiring or growth strategy, will be most affected by volatility risk. Volatility within the firm is more of a concern for respondents from North America and Asia-Pacific regions while those from Europe are more worried about the prospects for volatility in their external environments, a worry that is no doubt exacerbated by the ongoing sovereign debt crisis in the euro zone. The survey also suggests that the impact of volatility risk on the financial performance of companies is likely to be the greatest in North America and Western Europe and the least in Australia, New Zealand and sub-Saharan Africa.
• Regulatory reform is increasing volatility risk, particularly for North American and European firms. More than one-half of respondents based in North America (52 per cent) and 43 per cent based in Europe think regulatory reform is adding to volatility risk, compared to only 18 per cent of respondents from South America who subscribe to that view. Overall, firms represented in the survey are most wary of market risk (50 per cent of respondents), followed by regulatory risk (39 per cent) and credit risk (37 per cent).  However, retail and corporate bankers have identified credit risk as their main source of volatility risk for their employers.
• Since the onset of the financial crisis, CFOs and CROs have become more accountable for coping with volatility in comparison to CEOs, who have become less so. This is particularly true in North America, where 36 per cent of respondents say their CFO is currently accountable for managing volatility at their company, compared to only 15 per cent who say this was the case before the global financial crisis. Worldwide, management boards and C-level executives are emerging as the stakeholder groups with the greatest influence on a firm's strategy to cope with volatility but investors appear to hold little sway over a firm's strategy to cope with volatility.