Crisis Management Versus Risk Management

Know Your Product

Before considering any individual transaction, it's important to know your company's risk philosophy. What is the risk appetite for this product, geography, customer? Does the company's success depend on this single transaction?

Companies and financial institutions usually know their products very well because they've developed them. However, selling a product in a new or changing market may create new product dynamics or risks, and these must always be addressed. Legal and regulatory differences may even affect the ability to offer the product, or to take action when a problem occurs. Unfortunately, the entrance into a new market is often in response to a sales opportunity within a limited time frame.

The cost of an appropriate market review may not be supported by the profitability on one transaction. Your company should carefully consider whether the potential for additional business supports the up front cost to understand the market, or whether a single opportunity can truly be structured appropriately on a cost-effective basis.

Another product risk: the seemingly minor 'tweaks' that have been requested by certain customers, or that have been made in response to the requirements of certain markets. Over time, minor adjustments in individual offerings may substantially change the nature of the product's risk. Additionally, minor changes to a product or transaction in one market may also significantly increase risk with another customer, or in another market.

Good risk management processes ensure that one-off modifications never become a permanent part of standard documentation.

Companies financing trade deals should be able to identify, evaluate, understand and mitigate the risks associated with every transaction.

Excluding derived financing structures, measuring pure financing risk is relatively easy — it is usually the notional amount of the transaction. But measuring other risks, such as regulatory, legal, tax, country/political and reputation, is much more difficult.

Proper assessment and mitigation require the participation of internal risk specialists — legal, compliance, accounting, credit or senior management — in the transaction process at the earliest opportunity.

Early risk identification and mitigation don't just facilitate the deal structuring process; they also help provide timely feedback to a customer when the deal is not viable as proposed. Customers deserve candor and should never be promised what ultimately cannot be delivered.


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