GARP RISK INDEX Q1 2011
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GARP RISK INDEX Q1 2011

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The GARP (Global Association of Risk Professionals) Risk Index is based on a survey among its members across the globe. The level has come down a bit, which signals a further improvement. However, ...

The GARP (Global Association of Risk Professionals) Risk Index is based on a survey among its members across the globe. The level has come down a bit, which signals a further improvement. However, commodity risks are perceived to have grown.

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GARP RISK INDEX Q1 2011 GARP RISK INDEX Q1 2011 Presentation Transcript

  • The GARP Risk IndexFirst Quarter 2011
  • [ The GARP Risk Index ] Key Findings • The Q1 GARP Risk Index was unchanged at 108, reflecting growing optimism about global market conditions despite ongoing structural imbalances in the US economy and abroad. • Rising commodity prices have now surpassed leverage as the market factor of greatest concern. • Weakness in US housing prices is a new macroeconomic factor to watch closely. • US monetary policy and Eurozone instability remain the principal risk factors heading into Q2; geopolitical tension stemming from recent unrest in North Africa and the Middle East now also weighs heavily on the minds of global risk managers.2
  • [ Contents ] The GARP Risk Index: An Overview ......................................................................................................................................................................................................4 Quantifying the Potential for Systemic Risk GARP Risk Index Trends Since Inception..............................................................................................................................................................................................5 GARP Risk Index vs. Country Risk Perceptions .................................................................................................................................................................................6 What Do Survey Results Indicate? Total Response Distribution ........................................................................................................................................................................................................................7 Overall Systemic Risk Assessment...........................................................................................................................................................................................................8 GARP Risk Index vs. Systemic Risk Composite..................................................................................................................................................................................8 Quarterly Change in Market Factor Composites...............................................................................................................................................................................9 Individual Risk Factors Response Distribution Across Risk Factors ......................................................................................................................................................................................10 Key Drivers of Commodity Prices ...........................................................................................................................................................................................................11 Impact of Geopolitical Unrest in MENA on US Systemic Risk ..................................................................................................................................................12 Riskiest Commodity Markets ...................................................................................................................................................................................................................12 Impact of Commodity Prices on Systemic Risk ..............................................................................................................................................................................13 Current Influence of Leverage on Systemic Risk ............................................................................................................................................................................14 Current Risk Associated With Debt Crisis in Geographic Regions ........................................................................................................................................14 Influence of Current Macroeconomic Indicators .............................................................................................................................................................................15 Current Impact of Financial System Factors ....................................................................................................................................................................................16 Current Importance of Various US Credit and Interbank Spreads ..........................................................................................................................................16 A Look Ahead Forward-Looking Perceptions About Systemic Risk Factors ....................................................................................................................................................17 Appendices Appendix A – Survey of Market Factors..............................................................................................................................................................................................18 Appendix B – Survey of Additional Factors Impacting Systemic Risk ................................................................................................................................203 View slide
  • The GARP Risk Index monitors current global perceptions of eight individual risk factors capable of triggering a systemic risk crisis in the United States.The GARP Risk Index:An OverviewDefining systemic risk Tracking global perceptionsSystemic risk may be best summarized as an economic shock or event(s) that Harnessing the expertise and market perceptions of global risk managers, thetriggers a market dislocation, creating illiquidity and the potential for failure of GARP Risk Index provides an informed assessment of current US market condi-one or more institutions while jeopardizing the integrity of the local or global fi- tions and the potential build-up (or otherwise) in system-wide risk in the US.nancial system. The GARP Risk Index tracks current perceptions about eight individual risk factors capable of triggering a systemic risk crisis in the United States including:Survey methodologyEach quarter Certified Financial Risk Manager (FRM®) and Energy Risk Professional • Health of the macro-economy(ERP®) holders worldwide are asked to provide their assessment, on a scale of • Financial leverage1 to 5 (1 – “Very Little Risk” and 5 – “Very Risky”), of the risk they currently associ- • Credit spreadsate with the eight market factors. Survey results are used to construct the GARP • Health of the US banking systemRisk Index, a scaled index based on the risk-weighted average responses for the • US equity market valuationseight market factors surveyed (refer to Appendix A for a description of each • Overall traded market volatilityfactor). Additional survey questions (refer to Appendix B) are developed to • Commodity pricesadd enhanced depth and color to the quarterly analysis. In some cases, original • Operational riskquestions are developed to help explain unique trends identified in a previoussurvey or gather additional information about current market developments.4 View slide
  • Quantifying the Potential for Systemic RiskGARP Risk Index down slightly — reaches lowest reading since inceptionThe GARP Risk Index decreased a half Chart 1A | GARP Risk Index Trends Since Inceptionpoint in Q1, has now reached a new lowof 107.81 as illustrated in Chart 1-A. 112.5 110.93 110 109.27 109.05 108.31 107.81 107.5 105 102.5 100 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 20115
  • Quantifying the Potential for Systemic RiskGlobal risk perceptions — a relative viewChart 1-B relates the GARP Risk Index to risk Chart 1B | GARP Risk Index vs Country Risk Perceptions (1st Quarter 2011)perceptions across eleven countries withthe highest active participation1 in the risksurvey. The US country risk composite of109.29 is only slightly higher than the GARP 115 113.72Risk Index (107.81), suggesting perceptions 113.19of US-based risk managers are consistent 113 111.15 110.94with a majority of their global counterparts. 110 109.77One interesting observation is the large gap 109.29between Singapore (102.08) and China 108.01 107.81 108 107.05(101.5) with the other participating countries. 105.71 105We drilled down a bit further to determine ifthis was simply an anomaly or suggestive of 103 102.08 101.5an ongoing trend. Chart 1-C illustrates theaverage GARP Risk Index since inception rel- 100ative to average composite country scores. Switzerland S. Korea Canada Taiwan India US UK Risk Index Germany Hong Kong Singapore ChinaWhile it appears the Q1 difference betweenSingapore and other countries was indeed Chart 1C | GARP Risk Index vs Country Risk Perceptions Averages Since Inceptionan anomaly, risk perceptions in China haveon average been well below those of otherregions. Moreover, there has been a consis-tent gap between Hong Kong and Taiwan 115relative to China. It’s possible that risk 112.44 112.42 113 111.41managers in Hong Kong and Taiwan, where 111.03 110.66financial markets are more developed and 109.99 109.95 109.94 110 109.54 109.07information flow arguably more open, are 108.60better prepared to assess current US 108market conditions. Alternatively, theChinese assessment of US market risk 105 104.30may simply be influenced by perceivedeconomic strength at home. 103 100 S. Korea Singapore Germany Canada US Taiwan India Hong Kong Switzerland Risk Index UK China1Responses from the eleven countries now contribute nearly 80% of all survey responses since inception.6
  • What Do Survey Results Indicate?Total response distributionThe aggregate response distribution for Chart 2 | Total Response Distribution (1st Quarter 2011)all factors is illustrated in Chart 2, whichdepicts the further migration from highto lower risk attribution for all eight 50%market factors. 45% 40% 35% Q4 Q4 30% 25% 20% 15% Q4 10% Q4 5% Q4 0% 1 Very Little Risk 2 Little Risk 3 Somewhat Risky 4 Risky 5 Very Risky7
  • What Do Survey Results Indicate?Systemic risk assessment improves as GARP Risk Index and systemic risk convergeRisk migration was even more pronounced Chart 3 | Overall Systemic Risk Assessment (1st Quarter 2011)in Chart 3, which depicts the shift inperceptions associated with systemicrisk specifically. Nearly 15% of survey 5% Q4respondents migrated from the two 0%riskiest categories in Q1. 5% Q4 0%This shift in sentiment contributed to anadditional 2% point decrease in the sys- 5%temic risk composite (108 vs. 110 in Q4) 0%and further convergence between the 15%GARP Risk Index and systemic risk 0%composite illustrated in Chart 4. Q4 5% Q4 Q4 0% 1 Very Little Risk 2 Little Risk 3 Somewhat Risky 4 Risky 5 Very Risky Chart 4 | GARP Risk Index vs. Systemic Risk Composite (1st Quarter 2011) 117.0 115.5 115.11 115.30 114.0 113.81 112.5 110.93 111.0 110.22 109.5 108.41 109.27 109.05 108.0 108.31 107.81 106.5 105.0 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 GARP Risk Index Systematic Risk Composite8
  • What Do Survey Results Indicate?Signs of improvement — but proceed with cautionWith the exception of commodities, there Chart 5 | Quarterly Changes in Market Factor Composites (1st Quarter 2011)has been a steady decline or relative flat-tening in risk perceptions across the eightmarket factors since inception (see Chart5). This trend continued in Q1 as illustrated 150in Chart 6. The assessment of risk attribut- +22.07% -9.52% -5.72% -1.92% -8.72% -5.50% +1.05% +0.98%able to commodities was again the outlier, 125evidenced by the 8.5% quarterly increasein the commodity factor composite. The 100commodity risk composite is now up 22% 75since inception, highlighting the growinginfluence of this volatile asset class on the 50overall Risk Index. Excluding commoditiesthe GARP Risk Index would register 105.03. 25If both commodities and financial leverageare excluded, the Index would decrease 0 Commodity Prices Leverage Macro Indicators Market Volatility Banking Health Credit Spreads Equity Values Operational Riskto 103.32. Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011Despite what appears to be growing opti-mism, there continues to be a number ofstructural imbalances in the US economy Chart 6 | Quarterly Change in Market Factor Composites (1st Quarter 2011)and abroad that could significantly impactmany of the market risk factors identified. 150The following issues in particular lead us 127 125 117 120to remain a bit apprehensive: 115 113 108 106 106 109 104 107 103 98 101 97 98 100• US dollar weakness• Stagnation in many US housing markets 75• Economic growth that appears to rely heavily on non-OECD demand (e.g. 50 China, India, Brazil, etc.) 25• European sovereign debt instability• Geopolitical tensions in the Middle +8.55% -4.17% -4.43% 0% -4.59% -3.74% +3.06% +2.06% 0 East and North Africa Commodity Leverage Macro Market Banking Credit Equity Values Operational Risk Prices Indicators Volatility Health Spreads Q4 2010 Composite Q1 2011 Composite9
  • Individual Risk FactorsCommodities surpass leverage as the most risky; volatility may be misleadingChart 7 is a summary of the distribution of Chart 7 | Response Distribution Across the Risk Factors (1st Quarter 2011)risk perceptions across all market factorsin Q1 along with their respective Q4 rank-ings. The steady rise in anxiety over com-modity prices continued in Q1. More than Rank 1 2 3 4 5 6 7 871% of risk managers in Q1 now consider 100%commodities to be “risky” or “very risky”(i.e. a 4 or 5 on the risk scale). Leverageis now the only other factor for which atleast half of survey respondents rated itspotential impact on US systemic risk in 75%the two highest risk categories. This isdown from 58% in Q4 and 64% in Q3. Thesteady decline in risk attributed to lever-age is a positive development and perhaps 50%recognition that the benefits of financialdeleveraging, albeit a slow process, arebeing strongly considered in the appraisalfor US systemic risk. 25%There were slight shifts in the rankings(and perceptions) associated with marketvolatility, banking health and credit spreads;macro indicators, market volatility, bank- 0%ing health and credit spreads now all Commodity Leverage Macro Market Banking Credit Equity Operationalhave virtually identical risk attribution Prices (Q4 Rank 1) Indicators Volatility Health Spreads Values Risk (Q4 Rank 2) (Q4 Rank 3) (Q4 Rank 6) (Q4 Rank 4) (Q4 Rank 5) (Q4 Rank 7) (Q4 Rank 8)profiles. The shift from 6 to 4 in the rank-ing of market volatility is noteworthy. It Very Little Risk Little Risk Mean Risk Risky Very Riskyappears global risk managers may nowbe re-focusing on volatility and its under-lying market impact despite a benign closer inspection, events in the Middle gest that markets have become a bitquarterly change in the CBOE Volatility East and North Africa and the March 11 complacent recently, especially in lightIndex (VIX). The VIX closed at 17.9 at the earthquake in Japan created a brief of what appears to be much globalend of Q1 which was essentially flat to the intra-quarter rise in the VIX before uncertainty.close on December 31, 2010 (17.75). Upon quickly retreating. This seems to sug-10
  • Individual Risk FactorsCommodity pricesThe rise in risk perceptions tied to commodi- Chart 8 | Key Drivers of Commodity Prices (1st Quarter 2011)ties continues to be the most interestingtrend in the risk survey. A number of funda-mental factors can be attributed to risingcommodity prices. The marginal increase inglobal demand for all commodities, prima- 100%rily from China, India and other non-OECDcountries in the wake of the “Great Reces- -2% 0% 0% +3%sion,” has undoubtedly had a significantimpact on global food and energy pricesin the past 12 to 18 months. 75%Deterioration in the US dollar has alsohelped drive commodities higher. Preciousmetals in particular have surged on concernthat current US monetary policy will con-tinue to suppress the US dollars value and 50% -2%create inflation that could potentially stifle +2%economic growth. Chart 8 illustrates thequarterly shift in perceptions associated +5%with four key drivers of commodity prices. +4% 25% -1% -2% -2% -5% 0% US Dollar Weakness Demand from Supply Commodity Investment Non-OECD Countries Imbalances Funds Perceived influence associated with key commodity price drivers Little Influence Some Influence High Influence11
  • Individual Risk FactorsCommodity pricesRecently, political unrest throughout the Chart 9 | Impact of Geopolitical Unrest in MENA on US Systemic Risk (1st Quarter 2011)Middle East and North Africa has createdmarket uncertainty. Concern that tensionsin the region might result in a 1970’s styleoil supply shock has driven global crude 100%oil prices and intra-quarter volatility higher. 65% 61% 39% 38%The direct impact of geopolitical risk is 75%difficult to quantify as its potential influ-ence can be felt across a number of direct 36% 44%and indirect market factors. We specifically 50%asked for feedback in a related surveyquestion in an attempt to gauge percep- 17% 21% 25%tions about the recent events in MENA 25%and their potential impact on US systemic 18% 18% 18%risk. Chart 9 summarizes the distribution 0%of risk associated with four specific fac- Oil Supply Higher Vol and Financial Market US Foreign Policy Distributions Commodity Prices Instability Intiativestors which clearly highlight the perceivedimpact on commodities. Impact of geopolitical events in MENA on systemic risk Little Influence Some Influence High InfluenceGiven this backdrop it is not surprising that Chart 10 | Riskiest Commodity Markets (1st Quarter 2011)apprehension around energy commoditieshas increased significantly in Q1. Morethan 80% of risk managers now rank 100%energy commodities in the highest risk +11% +9% +2%category, a quarterly increase of morethan 11%. Risk perceptions associated 75%with agricultural commodities rosesharply as well. Chart 10 highlights the 50%changing profile of perceived risk associ- -1% -3%ated with energy, agriculture and basemetal commodity markets respectively. 25% -7% -6% -1% 0% -4% Energy Agriculture Base Metals Perceived risk associated with major commodity markets Very Little Risk Somewhat Risky Very Risky12
  • Individual Risk FactorsCommodity pricesChart 11 provides a snapshot of the quar- Chart 11 | Impact of Commodity Prices on Systemic Risk (1st Quarter 2011)terly shift in perceptions surrounding theinfluence of commodity price behavior onUS systemic risk. The impact of inflationcaused by higher commodity prices is 100%now considered the greatest threat, fol-lowed closely by concern that a commod- +14% 0% +3%ity asset bubble has now been created.We wonder if the exchange trading limitsrecently imposed by the CME Group on anumber of major commodity indices is the 75%beginning of a global re-evaluation of riskacross all commodities. It certainly ap-pears to be the case, judging by the sharpsell-off in commodities and a more than10 point jump in the CBOE petroleumvolatility index (OVX) on May 5. 50% -3% +1% 25% -4% -1% 0% -10% 0% Inflation Slows Economic Growth Speculative Asset Bubble Financial Market Instability Commodity price behavior and its influence on Systemic Risk Little Influence Some Influence High Influence13
  • Individual Risk FactorsFinancial leverage — sovereign debt worries drag onSovereign debt worries remain a leading Chart 12 | Current Influence of Leverage on Sytemic Risk (1st Quarter 2011)cause of concern among risk managers(see Chart 12). This is not surprising giventhe lack of resolution to the Europeandebt crisis that appears to be worsening. 100%In early April, Portugal became the third -6% -9% -1%Eurozone country (after Greece and Ire- 75%land) to request financial assistance torepay maturing debt obligations. This fol- -5%lowed a Fitch downgrade of Portuguese 50%government debt from AA to AA- in late +9%March. More recently, on May 9 Standard 25%and Poor’s issued a downgrade of long- +5% +6%term Greek government debt to B from +1% 0%BB-, while Moodys downgraded Greece 0% Government Debt to GDP Consumer Debt to Personal Income Corporate Debt EBITDAto Caa1 from B1 on June 1. Add to this theimpact of the March 11 earthquake and Perceived risk of leverage on the potential build-up of US systematic risk Little Impact Mean High Impacttsunami on Japan’s tenuous economic con-dition and the US government debt burdenwhich is now equivalent to roughly 90% of Chart 13 | Current Risk Associated with Debt Crisis in Geographic Regions (1st Quarter 2011)GDP, and growing.It’s not clear exactly how a foreign sover- 100%eign debt crisis might directly impact the 63% 47% 46% 38% 20% 9%US but we do get a glimpse of the regions 31%of most concern in Chart 13. 63% of risk 75% 45%managers surveyed were of the view thata European debt crisis would have a high 28% 60% 50% 31% 28%probability of creating systemic risk eventin the US. Unfortunately, without strong 29% 34% 35%economic growth or politically unpopular 25% 26%fiscal policies, it’s difficult to imagine any 22%significant improvement or an end to 8% 0%government bailouts in the region. Europe MENA North America Asia South America Australia Perceived probability of a local debt crisis creating a US systemic risk crisis in 2011 Low Probability Mean High Probability14
  • Individual Risk FactorsMacro indicatorsChart 14 depicts the shift in risk perceptions Chart 14 | Influence of Current Macroeconomic Indicators on US Systemic Risk (1st Quarter 2011)associated with nine fundamental macro-economic indicators, providing furtherevidence of the improvement in globalperceptions about the US economy. While 100%most trends were positive, there were two -2% +19% +1% -9% -2% +3% +7% -1% +2%negative developments worth noting. A7% increase (39% to 46%) in respondentsexpressing significant concern about infla-tion, a response we assume is highly corre-lated with rising commodity prices. More 75%interesting is the 19% increase (39% to 58%)in respondents who expressed concern thatfalling US home values will have a stronginfluence on systemic risk. The “housing 0%impact” has been discussed for some time, 0%with many experts of the view that a fore- 50% -2%closure overhang will be a major obstacle to -1%long-term market recovery. Some have also +6% +2%speculated that the expiration of the home +3% -11%buyer tax incentives last year would be theimpetus for a double dip decline in the UShousing market. Two recently published 25%housing price surveys appear to confirm +6%these fears. In early May zillow.comreported that US home prices in some -5% +1% -2%areas decreased 3% in Q1, the steepest -8% +3% -2% 0%quarterly drop in more than two years. -4% -4%Moreover, data from the S&P/Case-Shiller 0%Home-Price Indices released May 31 indi- Unemployment Housing Consumer Debt US Current Consumer GDP Growth Change in CPI Personal Income US Equity Prices to Income Account Deficit Confidence Growth Valuescated that US national home prices fell 4.2%during Q1 with a 5.1% annual decline sinceQ1 2010. Based on this metric US home Impact of each factor is displayed from top to bottom based on perceived level of influence on US systemic riskprices nationwide are now reportedly at Weak Influence Mean Strong Influencelevels last seen in 2002.15
  • Individual Risk FactorsUS banking system and credit spreads remain stable for nowThere was little change in the perceptions Chart 15 | Current Impact of Financial System Factors on US Systemic Risk (1st Quarter 2011)of factors directly associated with the USbanking system and credit spreads respec-tively (see Charts 15 and 16). These are notsurprising results and are consistent with 100% 0% +1% +3% +1% +2%the return to profitability across the bankingsector and the general stabilization of 75%credit spreads and market liquidity acrossmost major credit markets. 50% -3% -1% +2% -1% 25% +3% -3% 0% -2% +1% 0% -3% Over-Reliance on Leverage Illiquid Asset Counterparty Exposures Innsuficient Regulatory Lack of Counterparty Portfolios Capital Capital Cussions Impact of various banking/financial system factors in creating US systemic risk Little Impact Mean High Impact Chart 16 | Current Importance of US Credit and Interbank Spreads in Predicting US Systemic Risk (1st Quarter 2011) 100% -2% -2% 0% -3% -4% 75% +2% 0% 50% +1% -4% +2% 25% +2% +1% +4% +3% 0% 0% Credit Default Swaps High-Yield LIBOR OIS Spread TED Spread Corporate Investment Grade16 Impact of various US credit and interbank spreads in predicting US systemic risk Low Predictive Value Mean High Predictive Value
  • A Look AheadWhat factors most concern global risk managers?Chart 17 summarizes the global risk Chart 17 | Forward-Looking Perceptions about Systemic Risk Factors (1st Quarter 2011)factors identified as having the greatestpotential to impact systemic risk in thecoming quarter. Results depicted belowrepresent the shifts in risk perceptions 100% -8% -10% +21% -5% -6% -2%relative to those summarized in Table 1of the Q4 Risk Index. US monetary policywas identified as the leading risk factor inthe minds of many global risk managers. 75%This not surprising considering the degreeof speculation over the merits and risksassociated with the handling of US mone-tary policy, in particular the launch of theFederal Reserve’s second major quantita- 50%tive easing (QE2) program late last year. +3% +4% -8% +6%It has been widely debated that QE2, and +8%its impact on US dollar weakness (which +4%coincidently is the fifth-ranked factor 25%below), has been a major driving forcebehind the rise in global commodities. Asnoted previously the European sovereign +3% -2% +4% -13% -1%debt crisis is far from a resolution. Global +2% 0%risk managers responding to the Q1 risk US Monetary Policy Eurozone Intability Geopolitical Risk US Sovereign Debt Value of USD US Muni Debtsurvey seem to agree, ranking it a closesecond to US monetary policy. Concern Influence on systemic risk Little Influence Some Influence High Predictive Valueabout geopolitical risk surged, registeringa 21% increase in respondents who nowconsider its potential influence on sys-temic risk to be very high on the heelsof recent events in the Middle East and be reinforced by the flow of investment defaults wane and record low issuanceNorth Africa. Concern about US municipal capital back into the US municipal bond volume provides price support.debt eased a bit, a view that appears to market during Q1 as fear of wide-spread17
  • Appendix ASurvey of Market Factors
  • Survey of Market FactorsThe following eight market factors were assessed by FRM holders from 62 countries to constructthe GARP Risk Index: Overall Health of the Economy Rate the impact on risk to the US financial system of various leading, lagging and coincident US economic indicators. Leverage in the Assess the potential impact on financial system risk in the US of total current economic leverage, including consumer and Economy business credit. Considering all current credit spreads, including corporate investment grade, high yield and credit default swap spreads Credit Spreads and rate their effect on financial system risk in the US. Health of Banking/ Assess the current state of the US banking and financial system, including the influence of newly adopted and proposed Financial System regulations on financial system risk. Equity Market Indicate perceived risk to the US financial system of current equity market valuations measured Valuations across the major US equity indices. Overall Traded Considering volatility indicators across each major traded market including equities, fixed income, commodities and foreign Market Volatility exchange, and assess their overall impact on system wide risk in US financial markets. Indicate the perceived risk to the US financial system of commodity valuations with particular focus on precious metal and Commodity Prices energy markets. Operations/Infrastructure/ Assess the influence on overall risk to the US financial system of current operational and infrastructure exposures, and Strategic Risk strategic business objectives currently adopted by US financial institutions. Maintaining any or all of the above and any other consideration you might have, please rate your assessment of risk in the Overall Systemic Risk US financial markets today.19
  • Appendix BSurvey of Additional Factors Impacting Systemic Risk
  • Survey of Market Factors In our effort to develop a deeper understanding of the underlying factors you considered in your responses to the above questions please provide your assessment of the following. I. Rate 1 to 5 (1 = very weak influence and 5 = very strong influence) the importance each of the following US economic indicators currently have in predicting or influencing US systemic risk. a. Unemployment •1 •2 •3 •4 •5 b. US current account deficit •1 •2 •3 •4 •5 c. Change in Consumer Price Index (CPI) •1 •2 •3 •4 •5 d. GDP growth •1 •2 •3 •4 •5 e. Ratio of consumer credit to personal income •1 •2 •3 •4 •5 f. Personal income growth •1 •2 •3 •4 •5 g. Housing prices •1 •2 •3 •4 •5 h. Consumer confidence •1 •2 •3 •4 •5 i. US equity values •1 •2 •3 •4 •5 II. Rate 1 to 5 (1 = very little risk and 5 = very high risk) the risk you currently associate with each of the following measures of leverage in the US and their potential impact on systemic risk. a. Government debt/GDP •1 •2 •3 •4 •5 b. Consumer debt/personal income •1 •2 •3 •4 •5 c. Corporate debt/EBITDA •1 •2 •3 •4 •5 III. Rate 1 to 5 (1 = very little predictive value and 5 = very high predictive value) the importance each of the following US credit and interbank spread relationships currently have in predicting systemic risk in the US. a. Corporate investment grade •1 •2 •3 •4 •5 b. High-Yield •1 •2 •3 •4 •5 c. Credit default swaps •1 •2 •3 •4 •5 d. TED spread •1 •2 •3 •4 •5 e. LIBOR OIS spread •1 •2 •3 •4 •521
  • Survey of Market Factors IV. Rate 1 to 5 (1 = very little impact and 5 = very high impact) the impact each of the following bank/financial system factors currently have in creating a potential “build-up” of systemic risk in the US. a. Insufficient regulatory capital •1 •2 •3 •4 •5 b. Counterparty exposures •1 •2 •3 •4 •5 c. Investment in illiquid asset portfolios •1 •2 •3 •4 •5 d. Over-reliance on leverage •1 •2 •3 •4 •5 e. Lack of countercyclical capital cushions •1 •2 •3 •4 •5 V. Rate 1 to 5 (1 = very weak influence and 5 = very strong influence) the influence each of the following factors currently have in creating a potential build-up of systemic risk in the US. a. Regulatory uncertainty/implementation •1 •2 •3 •4 •5 b. Global sovereign risk – “debt crisis” •1 •2 •3 •4 •5 c. Insufficient risk management practices •1 •2 •3 •4 •5 d. US domestic policy agenda •1 •2 •3 •4 •5 VI.Rate 1 to 5 (1 = very little risk and 5 = very high risk) the risk you associate with the following potential effects of rising commodity prices and their impact on systemic risk in the US. a. Inflation •1 •2 •3 •4 •5 b. Greater market volatility •1 •2 •3 •4 •5 c. Over speculation (asset bubble) •1 •2 •3 •4 •5 VII. Rate 1 to 5 (1 = very weak influence and 5 = very strong influence) the influence each of the following factors currently have on commodity price risk and its potential impact on systemic risk in the US. a. US Dollar weakness •1 •2 •3 •4 •5 b. Emerging market growth (demand) •1 •2 •3 •4 •5 c. Supply imbalances (including impact of government subsidy programs) •1 •2 •3 •4 •5 d. Commodity based investment funds (e.g., growth in Commodity ETFs) •1 •2 •3 •4 •522
  • Survey of Market Factors VIII. Rate 1 to 5 (1 = very little risk and 5 = very high risk) the risk you associate with the following specific commodity markets and their potential impact on systemic risk in the US. a. Base metals •1 •2 •3 •4 •5 b. Energy products •1 •2 •3 •4 •5 c. Agricultural products •1 •2 •3 •4 •5 IX. Looking forward to the Second Quarter and beyond please rate 1 to 5 (1 = very little concern and 5 = very high concern) the concern you and/or your firm associate with each of the following factors and their potential impact on a build-up of US systemic risk. a. Global economic growth (GDP) •1 •2 •3 •4 •5 b. Value of the US Dollar •1 •2 •3 •4 •5 c. Eurozone instability •1 •2 •3 •4 •5 d. Regulatory Implementation •1 •2 •3 •4 •5 e. Asian market inflation •1 •2 •3 •4 •5 f. European market inflation •1 •2 •3 •4 •5 g. US deflation •1 •2 •3 •4 •5 h. Asian market deflation •1 •2 •3 •4 •5 i. European market deflation •1 •2 •3 •4 •5 j. US monetary policy (including “Quantitative Easing Program”) •1 •2 •3 •4 •5 k. US sovereign debt •1 •2 •3 •4 •5 l. US municipal debt •1 •2 •3 •4 •5 m. Foreign sovereign debt •1 •2 •3 •4 •5 n. US fiscal policy agenda •1 •2 •3 •4 •5 o. Geopolitical risk •1 •2 •3 •4 •5 p. Inadequate transparency in derivatives markets •1 •2 •3 •4 •5 q. Cyber attacks (technology breaches) •1 •2 •3 •4 •5 r. Operational risk (including liquidity risk) •1 •2 •3 •4 •523
  • Survey of Market Factors X. Please rate 1 to 5 (1 = very little risk and 5 = very high risk) the level of risk you associate with the following geographic regions and the likelihood a local debt crisis in each of these regions will impact systemic risk in the US. a. Asia •1 •2 •3 •4 •5 b. Australia •1 •2 •3 •4 •5 c. Europe •1 •2 •3 •4 •5 d. MENA (Middle East and North Africa) •1 •2 •3 •4 •5 e. North America •1 •2 •3 •4 •5 f. South America •1 •2 •3 •4 •5 XI. Given recent events in the Middle East and North Africa please rate 1 to 5 (1 = very high risk and 5 = very low risk) the level of risk you associate with each of the following affects of global geopolitical risk and their impact on systemic risk in the US. a. Financial market instability •1 •2 •3 •4 •5 b. Increased volatility and higher commodity prices •1 •2 •3 •4 •5 c. Oil supply disruptions •1 •2 •3 •4 •5 d. US foreign policy initiatives •1 •2 •3 •4 •524
  • Creating a culture ofrisk awareness.TMGlobal Association ofRisk Professionals111 Town Square PlaceSuite 1215Jersey City, New Jersey 07310USA+ 1 201.719.7210Minster House, 1st Floor42 Mincing LaneLondon EC3R 7AEUK+ 44 (0) 20 7397 9631www.garp.orgAbout GARP | The Global Association of Risk Professionals (GARP), a membership organization of over 150,000 individuals, is the only worldwide organization offering comprehensive riskmanagement certification, training and educational programs from board-level to entry-level, allowing a firm to create a culture of risk awareness throughout an organization. All of GARP’sprograms are developed and maintained by industry-leading risk practitioners and academics, ensuring the courses and materials are consistent and reflect the latest global standards inrisk management. To learn more about GARP, visit www.garp.org. © 2011 Global Association of Risk Professionals. All rights reserved. 06-11