Terror attacks, derivatives backlogs and Internet fraud have been identified as key risks facing the financial services sector in 2006.
In its annual Financial Risk Outlook, the watchdog call for companies to continually reassess their ability to deal with the risks they face and with possible financial shocks.
The 100-page report details the key risks and emphasises the need for the senior managers of financial service firms to carry out stress tests to identify how their firms would respond to adverse conditions.
The ability to aggregate risks in stress testing will give firms a more complete sense of the risks they face, suggests the FSA, including hidden correlations across portfolios. Evidence suggests that this remains a key challenge for many firms that, if it is not addressed, leaves them vulnerable to sudden events.
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