Module 1 - Unit 4 Risk Assessment 1: Introduction And Identification Flashcards
How would you define Risk Assessment?
The overall process of risk identification, risk analysis and risk evaluation
What is Risk Perception?
When assessing risk is important to be aware that different individuals in an organisation may hold different risk perceptions, known as “expert judgements”
What are the 3 risk assessment considerations?
Risk Identification
- What might happen?
Risk Analysis
- How likely is to happen?
- If it does, what might be the impact?
Risk Evaluation
- So what?
- Is it within our risk appetite and tolerance?
What is VaR?
VaR is a measure of the potential loss in a portfolio over a given time horizon within a given confidence interval.
X - probability or percentage (confidence level we are seeking)
V - value at risk (the amount we expect to lose)
T - time period we are considering
What is expected shortfall?
Expected shortfall, sometimes called ‘expected tail loss’ it is defined as the average loss that could occur in excess of the loss calculated by VaR over a time period and using the same confidence level. Expected shortfall overcomes VaR limitations.
What is stress test?
Stress testing and scenario analysis provide alternative to VaR and other risk measures. They explore reactions to small (sensitivity) or drastic (stressed) changed in conditions.
Stress testing and scenario analysis techniques are being used for:
• Assessing capital and liquidity requirements
• Understanding the dynamics of the risk environment and therefore providing a tool for decision making
• Challenging the output of VaR or other models
• Informing senior management
How are risks classified?
Risks are classified as:
• short-term - risks with imediate impact (operational activities or market changes)
• medium-term - in bank reporting medium term is between 1-3.5 yrs
• long-term - in bank reporting over 3-5 yrs
What is Monte Carlo simulation?
Monte Carlo simulation is a model used to predict the probability of different outcomes when the intervention of random variables is present.
Explain the top down risk
A top down risk assessment exercise tends to focus on risks related to strategy, tactics operations and complicance (STOC)
Explain the bottom-up risk
A bottom-up risk assessment tends to focus on risks identified as compliance, hazards, control and opportunity.
What is the variance - co variance method? (Known as the Risk Metrics approach)
Variance is a measure of the variability or spread in a set of data (e.g., market returns)
Covariance is a measure of the extent to which corresponding elements from two sets of data move in the same direction.
• results are normally distributed
• correlations between risk factors are constant
• sensitivity to changes of risk factors is constant
What is the historical method?
The historical method re-organised actual historical returns.
What is the Reverse Stress Testing?
The stress tests start from the point at which the businss plan becomes unviable. The process is intended to drive an understanding of what might bring a business down.
What is the BOW-TIE tool?
The bow-tie tool purpose is to demonstrate that sources of risk can lead to events that have consequences. The diagram helps to focus on the precise nature of each risk and provides a logical basis for analysing the context, causes and consequences.
What is PESTLE?
PESTLE is a risk classification system for calssifying risk from the organisation’s EXTERNAL CONTEXT
Political
Economic
Social
Technological
Legal
Environmental
What is the FIRM scorecard?
The FIRM scorecard classifies risks as:
Financial
Infrastructure
Reputational
Marketplace
Risks are derived:
Internally (e.g.,staff fraud) - FINANCIAL AND INFRASTRUCTURE RISKS
Externally (e.g., exchange rate valiability) - REPUTATIONAL AND MARKETPLACE RISKS
What are the advantages/disadvantages of top down risk?
Advantages:
• Likely to result in an Enterprise wide approach
• Most significant strategic risks can be captured quickly
• Shows management buy in
• Likely to encourage consistent methodology
Disadvantages:
• Senior Managers more focus on external risk
• Limited awareness of internal operational risk or interdependencies
• Danger that the approach becomes superficial because senior managers believe they can manage crises
• New emerging risks from the operational activities might not be fully identified
What are the advantages and disasvantages of bottom up risk?
Advantages:
• Buy in at all levels
• Can be mirrored to an existing organisation chart and risk impacts beyond immediate operational risks can be discussed
• Operational staff have good awareness of local risks which may not be visible to senior management
• Methodology can be varied to suit norms and culture.
Disadvantages:
• Little focus on external or strategic risks
• Time consuming and may demotivate
• Danger that the approach becomes too detailed leading to silo approach
• New risks emerging from the operational activities might not be reported by operational staff
What are the three reasons that organisations clasify risks?
- To provide structure to the process of risk identification
- Helps with the development of consistent risk terminology
- Enables the organisation to collect together similar risk types throughout the organisation.
Give examples of 4 Assessment Techniques:
Questions & Checklists
Workshop & Brainstorming
Inspection & Audits
Flow Charts
What are the advantages/disadvantages of using Questionnaires & Checklists to undertake risk assessment.
Advantages:
• Consistent structure guarantees consistency
• Greater involvement than in a workshop
Disadvantages:
• Rigid approach may result in some risks being missed
• Questions will be based on historical knowledge
What are the advantages/ disadvantages of using Workshops and Brainstorming to undertake risk assessment.
Advantages:
• Consolidated opinions from all interested parties
• Greater interaction produces more ideas
Disadvantages:
• Senior management tends to dominate
• Issues will be missed if incorrect
people involved
What are the advantages/ disadvantages of using Inspections and Audit to undertake risk assessment.
Advantages:
• Physical evidence forms the basis of opinion
• Audit approach results in good structure
Disadvantages:
• Inspections are most suitable for hazard risks
• Audit approach tends to focus on historical experience
What are the advantages/disadvantages of using Flow charts to undertake risk assessment.
Advantages:
• Useful output that may be used elsewhere
• Analysis produces better understanding of processes
Disadvantages:
• Difficult to use for strategic risks
• May be very detailed and time-consuming
5 Financial Services risk classifications
• Credit Risk - (e.g., counterparty failure to pay)
• Market Risk - (e.g., losses in on and off balance sheet position due to movements in marketplace)
• Liquidity Risk - (e.g., bank unable to settle obligations immediately)
• Operational Risk - (e.g., failed internal processes, people, systems etc.)
• Insurance Risk - (e.g., underwriting risk, claims management risk)
5 types of STRESS TESTING
• sensitivity test (where firma changes factors in its models such as corelations or rates)
• historical events (historical event in the past if ocurres today)
• customised events (making up an event that didn’t occur)
• multiyear stress tests (understand the impact of a cash flow)
• reverse stress test (understand what might bring a business down)
