ERM Portfolio View of Different Risks
This major financial institution used to estimate capital at risk and loss provisioning on a product-by-product basis, using experience-based percentages. Using Enterprise Risk Management (ERM) principles and after a review of available models across industries, it built a comprehensive framework and model allowing it to include all its products on a comparable basis and to simulate potential future scenarios. This approach allowed it to take into account concentration and diversification portfolio effects, thereby providing a more realistic view of the overall risks it was taking. The impact of adding new product lines or major transactions to the business could be simulated, providing an enlightening comparison of potential returns versus increased or decreased relative levels of risk on a portfolio basis.
