Risk measurement
Category: Corporate Governance
Accurate and timely measurement of risks is a critical component of effective risk management. A bank that does not have a risk measurement system has limited ability to control or monitor risk levels. The sophistication of the risk measurement tools a bank uses should reflect the complexity and levels of risk it has assumed. Good risk measurement systems assess both individual transactions and portfolios. The bank should verify the integrity of the measurement tools it uses periodically.
For example: many western banks use internal models for measuring exposure to market risks. It is based on the following general conceptual framework: price and position data arising from the bank’s trading activities, together with certain measurement parameters, are entered into a computer model that generates a measure of the bank’s market risk exposure, typically expressed in terms of value-at-risk. This measure represents an estimate of the likely maximum amount that could be lost on a bank’s portfolio with a certain degree of statistical confidence.