Risk and basic risk management framework

Risk is the possibility of loss or adverse outcome arising from uncertainty in future events. In banking, it refers to the probability that actual returns will differ from expected returns due to various internal or external factors.

Measuring risk in numerical terms to enable informed decision-making.

Banks face credit risk, market risk, and operational risk as the three broad categories, often referred to as the Basel II risk pillars. These are supplemented by liquidity risk and other risks like reputational and strategic risk.

Transfer shifts risk to another party; avoidance eliminates the risky activity entirely.

Risk refers to situations where the probability of outcomes can be estimated based on historical data or models, whereas uncertainty refers to situations where probabilities cannot be assigned at all. Risk is quantifiable; uncertainty is not.

Combining individual risk exposures to assess total organisational risk.

Risk appetite is the aggregate level and types of risk a bank is willing to assume within its risk capacity to achieve its strategic objectives. It is formally articulated in a Risk Appetite Statement approved by the Board.

Risk of loss from adverse interest rate movements affecting banking book positions.