Managing liquidity and risk continue to remain a challenge in the current economic environment and need to be dealt at micro as well as macro levels.
For risk managers, the immediate task at hand is to start working at strengthening risk and liquidity management and also be prepared for any possible after shocks of the economic turbulences, analysts said.
"There are two key courses of action that challenge us – how to manage liquidity and risk in the current climate of dysfunctional markets, and reforms of the legal, regulatory and market infrastructure to support a sustained recovery and renew confidence in markets, their regulators and key players. The current financial architecture and its components requires re-design to ensure sound and efficient markets," said Dr Nasser Saidi, Chief Economist, DIFC Authority.
The region faces issues such as risk management being more compliance driven and treated as an expense not an investment, said Dr Sunil Kumar, Senior Garp Member and Head of Risk Management Middle East, FRSGlobal.
"Risk management in the region has been confined more to the expense side of the business rather than revenue side. If the approach changes, we will see a lot of positive developments," he said.
Emphasising the need for a better understanding of liquidity and risk management in the Arab World, Dr Saidi said: "Understanding risk and liquidity management gives a company a strong advantage in surviving a downturn and emerging well-positioned for growth when the economic climate turns around. On the other hand, ignoring the fundamentals of cash flow and market related risks could be fatal for a firm, especially in a market that is squeezed and credit is unavailable.
"Fundamentally, the primary responsibility rests on central banks and monetary authorities to address and mitigate the systemic risk from illiquidity, contagion, financial linkages and network effects.
"Liquidity risk management is a micro concern at the level of companies and a macro concern at the level of the regulators and central banks who need to ensure sound and functional markets. We need to put in place an overall liquidity management framework. This will be a challenge for our region that requires developing money and debt markets."
One of the biggest issues, said Dr Kumar, is that risk management needs to be an internal exercise for an institution. "The regulators' role should be confined to managing risk at industry level rather than individual. It would be in the best interest of, say a bank, to develop its own risk management culture to make it stronger so that it adds up to entire risk management framework."
Risk managers should be watchful and should start cleaning up the mess and at the same time be careful of the after shocks we may face, he added.
The global financial crisis has highlighted the need for adequate liquidity management at all firms, financial and non-financial.
"Many of the companies that have experienced problems have suffered from a poor framework for managing and planning liquidity needs. Managing liquidity risk is a critical component of overall risk management, as a liquidity shortfall in one institution can have system-wide consequences, even across borders," said Bryan Stirewalt, DFSA Director of Supervision.
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