TraceRiskCapital & Reserves

Capital & Reserves

Risk Inventory

Risk Inventory is a “fourth” dimension of risk that provides insight into embedded elements of risk that are not specifically covered by a Key Risk Indicator. Subtle risks are inventoried in this way so that they can be studied orthographically. What does that mean? Orthographic representations of risk are from made from the front view (Subjects), the top view (Silos), the end view (COSO), and, from the inside out ( which is ‘Risk Inventory’). Examples of risk inventory are Product Development Risk, Customer Relations Risk, Training & Backup Risk and Denial of Service Risk.


Concentrations of Credit

Use Case for Concentrations of Credit

Use Case: All banks have credit concentrations. In some cases, this is by choice as the institution seeks to develop expertise in a particular segment. In other cases, it may be the result of mergers or acquisitions. Alternatively, credit concentrations may be unavoidable due to a lender’s limited geographic footprint combined with its market’s dependence on a relatively few employers or industries. Whatever the reason, it is incumbent on management and the board of directors to ensure that the bank has an effective process in place to identify, measure, monitor, and control concentration risk. The board of directors also needs to ensure that the bank maintains adequate capital relative to concentration risks. Although each individual transaction within a concentration may be prudently underwritten, collectively the transactions are sensitive to the same economic, financial, or business development events. If something triggers a negative development, the risk is that the sum of the transactions may perform as if it were a single, large exposure. Identifying, measuring, and appropriately mitigating concentration risk is ultimately dependent on the accurate and timely receipt and analysis of data. The absence of a sufficiently robust set of data elements will hinder an institution’s ability to identify and monitor concentration risk, regardless of the data’s accuracy and timeliness.

Who Should Assess the Risk? Chief Credit Officer, Chief Lending Officer, Credit Administrator

 

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Allowance for Loan & Lease Loss Risk

Use Case:
The purpose of the ALLL is to reflect estimated credit losses within a bank’s portfolio of loans and leases. Estimated credit losses are estimates of the current amount of loans that are probable that the bank will be unable to collect given the facts and circumstances since the evaluation date (generally the balance sheet date). That is, estimated credit losses represent net charge-offs that are likely to be realized for a loan or group of loans as of the evaluation date. The ALLL is presented on the balance sheet as a contra-asset account that reduces the amount of the loan portfolio reported on the balance sheet. The risk to the bank is that the ALLL is miscalculated which can lead to over / underfunding of the allowance and provision accounts, erroneous Call Reporting and adverse capital, earnings, regulatory and reputational implications.

Who Should Assess the Risk: Chief Credit Officer, Chief Lending Officer, Credit Administrator, Chief Financial Officer