Appendix 3: Business risk quantification

Lutz Baumgarten

Typically, business risk is referred to as “the risk of volumes decreasing or margins shrinking with no opportunity to offset the revenue decline with a reduction in costs”. Business risk factors include a competitive environment, the macroeconomic environment, political risks, new product risks, strategic risks, reputational risks, regulatory risks, legal risks, tax risks and IT risks. Business risk quantification completes the universe of risks for capital requirement estimation and financial planning, and can be implemented with the help of a scenario-based approach (SBA), as explained in this appendix.

Historically, the development of formal risk quantification processes and corresponding capital estimations has been driven by the availability of data for quantification and the effectiveness of the risk management actions derived from the risk quantification metrics, rather than the risk potential impact on shareholder value. Market risk quantification started to be widely adopted in the late 1980s, facilitated by RiskMetrics methods. Market risk data is the most plentiful, and risk management can be performed easily by buying and selling securities and derivatives in

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