Portfolio risk management

Portfolio risk management for banks and building societies

Sweeping regulatory changes are forcing banks to develop more effective tools to model and recognise risk and ensure alignment with the specific characteristics of the business. Consequently, there is a call for more rigorous methods to tie risk events to capital requirement, cash flow requirement and earnings’ expectations.

Risk-based capital management (or economic capital management) when coupled with an enterprise-wide risk-aware culture gives organisations a powerful new source of competitive advantage. It can help an organisation to identify threats, weaknesses or opportunities that may be missed by competitors, and target investment where it can earn the best risk-adjusted returns. It can also help to align risk appetite with capital allocation and communicate the tangible strengths and potential of the business to analysts, investors and rating agencies. Just as importantly, it ensures that the process underpinning decisions made outside normal risk frameworks is sufficiently rigorous.

Reply supports organisations with all aspects of economic capital calculation and allocation by:

  • Determining the capital resources required to support material risks faced by an organisation (or for a given transaction);
  • Estimating correlations between risk exposures, risk types and business lines;
  • Defining macro-economic scenarios, deriving stressed parameters, analysing the likelihood of scenario occurrence and the associated impact on capital requirements;
  • Building and validating the models required, and outlining the appropriate course of action to mitigate stressed and worst-case scenarios;
  • Allocating the necessary risk capital at transaction, business line, customer, organisational product or group level.

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