Although I was General Counsel of the Clearing House and CLS, participating in these and related developments, it took the events of 2007 and 2008 to drive home their significance. Now, with a slow-down in the world economy and even the possible demise of the euro, do we once again need to prepare for the unthinkable? And how can any individual firm do so?
At the very least firms need to recognize that these types of risks cannot be managed in silos; there must be a cohesive approach across all business areas and breakpoints – from liquidity and credit risks to regulatory and reputational risks. If the euro is redenominated, businesses may face market closures, reversion to and rapid devaluation of legacy currencies, mandatory bank holidays, restrictions on convertibility, and a lack of liquidity. A scenario analysis can help identify how such developments might impact key clients, key markets, and most critically –in the short term – liquidity needs. The information gathered in this analysis should be factored into credit and risk management plans. But most importantly, it needs to be communicated to key people. Your board and your staff need to be prepared for various scenarios, and you may also need to communicate with regulators and suppliers. A careful analysis of and preparation for all contingencies can help a firm survive even the unthinkable.