RiskTech Forum

Evaluating the Economy to Create Safer Risk Management Programs

Posted: 24 October 2012  |  Author: Malissa Lundgren  |  Source: BPS Resolver

The performance of the national economy can have a major impact on the risk management policies and programs launched by companies, so risk managers should always keep one eye trained to it.

While there are several reasons businesses run risk management programs, financial security is at the top of the list. Sure, brand reputation and shareholder trust are vital considerations, but at the end of the day, the difference between a successful company and a failing one is often its current financial standing.

Because of the importance of businesses' financial standings, the current performance of the economy can have a great impact on risk management programs and initiatives. Risk professionals may allow their companies to take more chances in a blossoming economy, but at the other end of the spectrum, organizations will need to scale back aggressive decision-making during times of economic trouble. Being able to objectively evaluate the economy is crucial to the success of a risk management program, Risk Management Monitor explains.

Assessing the current state of the economy is no easy task. The recently released "Current Economic Conditions" report from the Federal Reserve District highlights how difficult this can be. Throughout the document, the Federal Reserve makes vague claims such as "economic activity generally expanded modestly since the last report." But what does this really mean? Terms such as "generally" and "modestly" don't give risk professionals much to work with when trying to develop threat mitigation programs for their companies.

Quantifying the Fed Report
Fortunately, economic analysts weren't content with the Federal Reserve report as it existed. Because it was so vague, The Wall Street Journal and Goldman Sachs broke down the outlook based on the use of specific words. By dividing the language used in the Beige Report into "good" and "bad" categories that expressed positive and negative sentiments, risk managers may be able to glean a more objective look into the economy.

"Our approach is simple," a Goldman Sachs spokesperson told The Wall Street Journal. "We compile a list of 'good' and 'bad' words frequently used in Beige Books to describe economic conditions and search historical reports for their relative occurrence over time. Although very simple, this word-counting exercise allows us to interpret the qualitative information in the Beige Book quantitatively."

The results are somewhat surprising – over the past few months, the number of good words used has declined from approximately 100 to just a shade over 50. At the same time, there are more occurrences of bad words – approximately 25 were used in August, while nearly 100 were found in the October report.

As risk managers continue to shore up companies against threats, it's crucial they keep the economy's performance under consideration as well. Risk management solutions can aid companies as they keep tabs on the various threats and opportunities that continue to make themselves apparent during the turbulent economy.