The Principles of Banking

Chapter 11

Risk Reporting, Risk Policy and Stress Testing

Successful bank management on a sustained basis requires effective risk reporting. Even the smallest banks will present difficulties in operation if the quality of high-level MI supplied to senior management is compromised. This chapter looks at the principle requirements for effective MI, and illustrates recommended best-practice with the use of hypothetical sample reports. It considers the required contents of a portfolio report, the presentation of the risk-return profile, and how the report results might be separated and shown. The introductory discussion is undertaken with reference to an hypothetical sample portfolio of 20 assets. Later in the chapter we provide samples of actual portfolio reports as part of the discussion.

The second part of this chapter discusses risk management and stress testing. As part of its strategy, a bank should formulate a high-level risk management policy to serve as the basis for the risk culture that exists within it. A bank should not leave it to operating departments to determine the extent of its risk tolerance. Rather, this should be articulated by the bank at the start. This can be done in its risk management policy. We provide a template that may serve as the basis for the formulation of risk management policy in a bank.

Stress testing and scenario analysis is now an established part of the risk management process in banks. We describe how the process should be set in a bank, again ...