Shedding Light on Non-Financial Risks – a European Survey

Shedding Light on Non-Financial Risks – a European Survey — January 2012

2. A General View of the Situation and Challenges

2.1. Major Non-Financial Risks and Degrees of Protection It is important to identify which sources of non-financial risk the respondents perceive as the most salient. We considered for the purpose of this survey the scope of risks than were discussed in Amenc and Sender (2010b). Under the “non-financial risks” umbrella, we include the non-financial component of other risks that may have a financial dimension, for instance counterparty risk, liquidity risk or sub-custody risk (see the introduction for further definitions). All of the specific risks come out at a very high level of importance, without a clear outlier. Some 78% of the respondents defined bankruptcy risk of an intermediary as important to them, 77% in the case of collateral risk, 79% for internal or external fraud, 80% for liquidity risk and 78% for breaches of investment rules. Mis-selling risk comes out lower, being important for only 70% of respondents. Non-financial risks are actual concerns for respondents

Looking at the country differences, it appears that respondents from France are significantly less concerned than their peers by all non-financial risks, except for collateral risk. The United Kingdom emphasises the risk of bankruptcy of an intermediary, which might stem from their recent experience, notably with the Lehman collapse. Both the United Kingdom and the group composed of Germany, Austria and the Netherlands appear to put more importance than average on the risk of fraud. From these results, it is clear that the risks we have highlighted in the scope of this study are sensible in the eyes of the respondents, and represent actual concerns for them. A natural second step in creating a hierarchy of non-financial risks is then to match the perceived importance to the perceived level of protection against those same risks. It would be logical that people will have insurance against those risks they see as the most prominent, unless of course no protection exists.

Figure 10: How important to you are the following non-financial risks?

26

An EDHEC-Risk Institute Publication