Calculating Risk Measures
Calculation of VaR is driven by country specific regulatory requirements, it can also be driven by region and product specific regulators. A segment can have its own regulator depending on the size of the market. USA has multiple regulators governing the different kind of markets while some countries can have a regulator overlooking everything. |
Calculation methodologies
Historic Simulation, Variance Co-Variance/parametric and Monte-Carlo simulation are commonly used methodologies to produce VaR numbers. In the Historical simulation approach, the distribution is made of scenarios sampled from history. Marginal VaR describes change in total var resulting from 1 dollar change of the component value (positions of different instruments) Incremental VaR is a change in VaR due to new position added to a portfolio. Component VaR is often used by risk management as it is additive i.e the component VaRs add up to the portfolio VaR. |
Var Calculation Inputs
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Reporting and Analytics
The reporting and analytics systems must be comprehensive covering: - Overarching Governance structure, supervisory workflows - Risk Data Aggregation across Organization levels, Regions and Lines of Business - Provide granularity across spectrum of the organization from leadership to management to support - Report on all key Risk Indicators, highlight areas of concern and emerging threats and opportunities - Provide analytical tools to monitor changes and transparency to lowest levels of data - Compliance to the Legal and Regulatory requirements The IT infrastructure must be scalable to support these capabilities. It must adhere to the principles for effective risk data aggregation and risk reporting by Basel Committee on Banking Supervision. -Governance & IT infrastructure -Accuracy and Integrity, Completeness, Timeliness and Adaptability - Comprehensiveness, Clarity and usefulness, Frequency and Distribution Refer to BCBS 239 principles here: www.bis.org/publ/bcbs239.pdf |
Monitoring Risk
Banks monitor various types of limits to reduce the risk exposure. Limits are authorized by the board and the senior risk management committees. They are allocated across the organization by risk types, business lines from top to bottom, regions, legal entities and countries. The risk organization reports and monitors the compliance against the approved limits. The types of limits used are:
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