Business Risk

Ahraz Sheikh

10.1 INTRODUCTION

Chapter 9 introduced the generalised risk modelling framework, which integrates liquidity risk, economic capital and stress testing. The block diagram in Figure 9.7 showed that the business line segment models require the following components to feed into the balance sheet projection:

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  revenue models;

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  cost models;

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  loss models.

As Part II of this book showed, loss models are available for each core material risk. Market risk, in describing the bidirectional nature of market investments, provides a profit and loss (P&L) distribution (ie, revenue and loss), based on the change in valuations that occur due to market movements. This is supported by counterparty credit risk (Chapter 7), which describes losses that occur when trade counterparties default. This covers the loss components of trading book portfolios, based on holding market positions. For banking book positions, the revenue component is covered by interest rate risk in the banking book (IRRBB) models, which is the subject of Chapter 11. Credit risk covers the corresponding losses due to obligor defaults. This covers the combination of revenue and loss components for