At the heart of crisis management is the challenge of being prepared for events that are rare and hard to predict. As recent events have shown, crises typically unfold rapidly in an unexpected way. In responding to a crisis, organisations need to be able to assess the nature of the problem and to decide on the appropriate course of action quickly and efficiently. To do this they need to develop a crisis reflex, a set of drills that is commonly understood within the organisation but that is flexible to meet the requirements of a particular crisis. The drills need to become second nature so that in the crucial first hours of a crisis, all parts of the organisation can play their part in co-ordinating a response. Building a better crisis reflex is a matter of developing, and then testing, crisis management arrangements in exercises.

Financial systems are vulnerable to crisis. While in normal circumstances it is possible to measure and model financial risks, events will still occur in combinations that are unforeseen and that give rise to changes in asset values and market prices that cause significant losses and threaten to overwhelm the buffers of capital and liquidity within the system. Such shocks are by their nature unpredictable and the impact of the shock will depend on the context - the strength of the system and the confidence of market participants. When shocks occur where confidence is fragile or some participants are vulnerable, they can set in train rapid changes that gather momentum and escalate quickly into crisis. Authorities and market participants need to be ready for these events and to be able to respond to minimise losses and stabilise the system.

Market participants and authorities need to have well developed plans for crisis management. An immediate challenge is to develop the reflex to be able to respond at the first signs of crisis - at what point has the threshold for crisis been crossed, who within the organisation should decide to switch to crisis mode, how is that decision communicated and to whom, what public statements can be made in a situation which is chaotic and uncertain.

The development of global markets, linked by firms and infrastructure that are international, means that shocks that start in one sector or market segment can transmit rapidly across markets and borders as firms race to close out positions.
Market liquidity can dry up adding to price volatility and uncertainty. Where uncertainty extends to doubts about counterparties, funding liquidity can tighten and problems occur in infrastructure.

In the face of uncertainty, organisations need to be able to gather information and reach a rapid judgment as to the scale of the problem. Some ex ante criteria are required for this assessment process to gauge severity and to determine the most appropriate course of action. While ex ante criteria are useful, judgments will depend on the precise nature of the shock and the market's reaction to it. That judgment will be based on imperfect and changing information.

Decisions are then needed on the actions to be taken. Market participants need to decide how to treat counterparties, whether to cut limits, whether to move to activate a contingency funding plan. For authorities, decisions are needed on whether intervention is justified and if so whether to provide liquidity, or indeed solvency support, to which firms on what terms. Careful consideration needs to be given to press handling and public statements to try and restore market stability.

As markets begin to stabilise, decisions are needed on how to return to more normal operations. For banks, where trading limits have been cut or credit limits to certain counterparties reduced, it will need to be judged at what stage these should be restored to pre-crisis levels. For authorities, where liquidity has been provided or regulatory rules have been suspended, it will need to be determined at what stage these special conditions be removed. A particular challenge arises where solvency support has been provided to one or many firms and how that public intervention in markets can be ended and normal market conditions resumed.

cma is a niche consultancy, designing crisis simulation exercises for, and providing related services to, financial authorities (finance ministries, central banks and regulators) and banks. cma is able to bring to bear experience and expertise in central banking and regulation that are unique when it comes to designing realistic crisis exercises that are at the forefront of current best practice. cma is international with clients in a number of countries. Recent assignments include designing a major international crisis simulation exercise involving the financial authorities from several EU countries.

At the heart of crisis management is the challenge of being prepared for events that are rare and hard to predict. Crises typically unfold rapidly in an unexpected way. In responding to a crisis, organisations need to be able assess the nature of the problem and to decide on the appropriate course of action quickly and efficiently. To do this they need to develop a crisis reflex, a set of drills that is commonly understood within the organisation but that is flexible to meet the requirements of a particular crisis. The drills need to become second nature so that in the crucial first hours of a crisis, all parts of the organisation can play their part in co-ordinating a response. Building a better crisis reflex is a matter of developing, and then testing, crisis management arrangements in exercises.

cma can help both with policy development (putting in place an effective crisis management framework, workable co-ordination arrangements for information-sharing and decision-making, and ensuring that measures to respond in a crisis are fit for purpose and ready to execute) and with testing. Exercises can be designed to meet the specific testing objectives of the organisation, whether more stylised desktop exercises, to allow decision-makers to think through the actions they would take in the event of a crisis, or a full crisis simulation to test how staff within an organisation or organisations would co-ordinate and work together in managing a crisis. cma can also support authorities and banks in the provision of independent, task-specific consultancy services.

Address
Crisis Management Analytics Ltd
58 Colebrooke Row
London
N1 8AF

Email
contact@crisismanagementanalytics.com

Telephone
+44 207 354 4730