The Global Financial Crisis – What’s on the Horizon?

This is a guest post by Randy Marshall, a managing director at Protiviti Inc.

In the coming weeks, months and years, we will continue to see regulators make a variety of moves
– both to deal with the current financial crisis and to prevent such disruptions in the future. In fact, regulators have already begun to and are likely to consider a wide range of issues including the industry’s operating model, Basel II capital and leverage requirements, liquidity management, stress testing, executive compensation, and the role of rating agencies.

However, even as regulators work out the details, there are things companies should be doing to address current challenges and to prepare for and withstand future market disruptions more effectively. Of course, while not every recommended activity applies to companies in every industry, the reality is that most, if not all, segments of the economy are being impacted by this crisis. Companies in all sectors should, at a minimum, be assessing their cash flow needs in light of the current credit markets and be revisiting their strategic and operating plans to determine what adjustments may be necessary to deal with existing conditions.

So what can companies do during this challenging economic time?

* Undertake a detailed review of the organization’s financial condition, with a focus on asset quality, liquidity, capital strength and financing alternatives

* Re-examine and challenge business and operating models in light of recent events and their expected impact on the future structure of the industry, its regulation and the wider economy.

* Understand and evaluate the options available under various government programs and private sector alternatives and determine the viability of such options.

* Review risk governance arrangements; scope and adequacy of risk identification, assessment and mitigation; and risk capabilities within the business and the boardroom.

* Introduce more extreme scenarios into stress testing of financial models, including resulting credit and market risk exposures, so that management and regulators understand where the breakeven points are on solvency, liquidity and capital adequacy, and also understand the key drivers or causes to those breakeven points.

* Undertake a review of the organization’s current risk management practices and opportunities for enhancing them based on the outlook of the operating environment over the next several years.

* Validate with the board of directors the risk/reward trade-off the organization has accepted and understand how it will be affected by different market scenarios.

* Take action to mitigate unacceptable financial risk.

* Review the structure of remuneration of directors and senior personnel in light of regulatory expectations, good practice indications and recommendations issued.

* Assess financing and capital adequacy and options for raising additional capital, if necessary.

* Explore strategic alternatives, including options for mergers, acquisitions and restructuring.

* Review strategic and operating plans and ensure they address all risks and incorporate the lessons learned (and that will continue to be learned) from the current crisis.

Taking the steps to really explore and test the many facets of your company will give you a better understanding of where your strengths and weakness lie and which of them may make you vulnerable to future market volatility. It’s a large undertaking, but one that’s well worth the time and labor expended. For more information about the global financial crisis, visit:

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Randy Marshall is a managing director and leader of the U.S. financial services practice at Protiviti Inc., a global business consulting and internal audit firm.