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  • Rory Roberts

How to Measure the Impact of a Risk

Loss View

A simple worst case loss view can be taken per risk in cash amount, usually defined as the worst case loss from the Risk Manifesting at its highest severity. Severity is generally viewed as the Impact by the Probability of the Risk Occurring and is usually depicted on a heat map.



Liquidity View

I. Assess the impact of the event: The next step is to assess the impact of the event on the bank's liquidity. This might involve analyzing the potential impact on the bank's ability to generate cash, such as through changes in revenue or expenses, or through the impact on the bank's funding sources.


II. Calculate the liquidity measure: Once the impact of the event has been assessed, the bank can calculate a liquidity measure, such as a liquidity ratio or net stable funding ratio (NSFR). These measures are designed to provide an indication of the bank's ability to meet its short-term and long-term liquidity needs.


III. Compare to benchmarks: The bank can then compare its calculated liquidity measure to relevant benchmarks, such as regulatory requirements or industry standards. This can help to determine the extent to which the event is likely to affect the bank's liquidity.


Solvency View

I. Assess the impact of the event: The next step is to assess the impact of the event on the bank's solvency. This might involve analyzing the potential impact on the bank's financial position, such as through changes in assets, liabilities, or equity.


II. Calculate the solvency measure: Once the impact of the event has been assessed, the bank can calculate a solvency measure, such as a capital adequacy ratio or leverage ratio. These measures are designed to provide an indication of the bank's ability to absorb losses and meet its financial obligations.


III. Compare to benchmarks: The bank can then compare its calculated solvency measure to relevant benchmarks, such as regulatory requirements or industry standards. This can help to determine the extent to which the event is likely to affect the bank's solvency.

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