Risk Index Fell in Q4 2010: GARP

The Global Association of Risk Professionals (GARP) released Monday its quarterly Risk Index, which found risk managers around the world are "warily optimistic" about the U.S. economy. The Index fell almost 3% to 108 in the fourth quarter of 2010, the lowest reading since it was first published in early 2010.

Chris Donohue, managing director for GARP's research center, noted in a statement that this quarter's Index is the "most positive to date, reflecting a sense of global economic recovery."

The systemic risk composite fell five points to 110. In fact, the only measure that grew was commodity prices; the risk weighted contribution to the Index increased 3.5% in the fourth quarter of 2010.

"Risk managers around the world remain on high alert regarding the commodities market," Donohue added. "Their continued concern in this area, specifically around energy commodity prices, reflects the concern that many Americans are experiencing with the rise of consumer oil prices."

Mike Sell, vice president of GARP's research group, noted in a phone interview with AdvisorOne that it's very hard to predict how the events in the Middle East will affect global perceptions about commodities risk. "It's a day-to-day, very unpredictable and fluid movement."

Sell expressed surprise over the "seeming lack of concern over speculation in commodities." Specifically, he said, the disconnect between relatively low concern over commodity-based investment funds and the very high level of concern about the possibility of a speculative asset bubble was surprising. Two-thirds of risk managers indicated higher commodity prices could lead to a speculative asset bubble, while 58% were concerned that commodity-induced inflation posed a "significant" threat to systemic risk.

"We've been living in a low-inflation environment, but how much longer can that last?" Sell asked. "If the economy is picking up steam, it stands to reason that inflation will pick up."

While worries about leverage fell in the fourth quarter, they are still the biggest concerns among risk managers, followed closely by concerns about commodity prices.

The Index noted that consumer debt concerns are still high, but "may have reached a plateau." Fewer managers said in the fourth quarter that they thought consumer debt would have a "high impact" on systemic risk, and the GARP pointed to a report by the Federal Reserve Bank of New York which found U.S. consumer debt fell 1.3% in the fourth quarter.

Managers agreed that capital in 2011 will be largely allocated to funding risk reporting, data management and regulatory implementation. They predict that the next big global economic crisis could come in the form of a non-U.S. national debt default, a commodities crash, or a non-U.S. banking crisis.

GARP surveyed over 600 global risk managers in December 2010 and January 2011 for the Index, which gauges global perceptions about the state of the U.S. economy.