Risk Management Practices in the Context of CCAR

Lourenco Miranda

THE RISK MANAGEMENT PROCESS: SETTING THE STAGE FOR CCAR

A typical risk management process comprises the following phases: risk identification; risk assessment; measurement/quantification; and risk decision (assume the risk, hedge it, sell it, mitigate it, etc). As is always the case, the posterior phase depends completely on the successful implementation of the antecedent. If identification fails, then all the rest of risk management is compromised. Therefore, risk identification becomes one of the most impactful parts of the whole CCAR process.

The capital planning and CCAR processes are completely dependent on the successful implementation and execution of each element of the risk management process, especially the risk identification phase. For capital planning and CCAR, it is imperative to identify exhaustively all the risks that the firm faces, as they should be addressed during the stress-testing exercise.

For instance, the most significant risks in a commercial bank are credit, market, operational, interest rate, foreign exchange and liquidity, although this is not an exhaustive list. There are also the hard to identify (and consequently hard to measure) risks, such

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