2. Risk Taxonomy Flashcards
What is a type of risk that can be both internal and external?
Reputational risk may be internally or externally triggered
What are the 2 categories of internal risk?
- Operational risk
- Strategic risk (relating to the strategic decisions and directions of the organizatoin)
What are the 4 categories of external risk?
- Financial market
- Political and regulatory risk
- Macroeconomic risk
- Environmental risk
Describe operational risk
Risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events.
Describe strategic risk
Risk that arises from adverse effects of strategic decisions made at the senior organizational level.
Describe financial market risk
Risk arising from the movements of the stock market, the interest rates and the exchange rates. Those are the risks generally associated with investments.
Describe political and regulatory risk
Risk arising from adverse political changes. The political climate and changes in laws can directly impact the operations of a firm and this creates a risk.
Describe macroeconomic risk
Risk arising from the business cycle and inflation. Those are the risks that arise from a change in the general state of the economy.
Describe environmental risk
Risk arising from changes in the environment such as climate change, pandemics, or natural disasters.
Describe reputational risk
Any risk that could damage the enterprise by damaging its reputation with customers or other stakeholders.
Describe stock market risk
Risk arising from general movements in financial markets
Describe interest rate risk
Risk arising from movements in the interest rate: when interest rates increase, the value of bonds decreases.
Describe exchange rate risk
Risk arising from a change in exchange rate that affect the ability to pay for liabilities in other currencies.
Describe systemic risk
Risk of disruption to financial services that is caused by an impairment of all or parts of the financial system
Describe liquidity risk
Not being able to make payments as they fall due because the assets holded are not liquid enough
Describe credit risk
Splits into market risk and default risk. Overall, it is the risk asociated with a change in credit worthiness of a counterparty or their default.
Describe spread risk
Risk arising from changes in spread (holding short-term bonds but long-term liabilities)
Describe people and people process risk
Includes people risk, behavioural risk and people process risk. It is generally associated with human error or even because employee do not have the satisfactory abilities.
Describe cyber risk
Potential losses arinsing from a firm’s IT systems, but commonly assossiated with criminal attempts to breach a firm’s security system.
Describe other information technology risk
IT risks that are not related to deliberate criminal activities.
Describe legal risk
Includes risk of lawsuit and defective contracts.
Describe project risk
Can be split into scope risk, defect risk, schedule risk and resource risk. A project risk arises when things don’t go according to plan in a project.
Describe process risk
Includes:
- Health and safety
- Manufacturing and Engineering
- Model risk
Describe pricing risk
Risk arising from a product that is priced too high or too low.
Describe business cycles risk
Very close to stock market risk. It’s arising from economy-wide fluctuations in the economic environment.
Describe inflation risk
Risk arising from a reduced real return due to a high inflation.
