Risk Assessment for Banks/FIs

 Risk Assessment for Banks/FIs

Banks and FIs conduct risk assessments to evaluate their operational processes against potential threats and vulnerabilities, considering the impact of those threats. A common approach is the Risk Control Self-Assessment (RCSA).

2.4 Likelihood and Potential Impact

In a risk assessment, two key factors are considered:

• Risk Likelihood: A qualitative assessment of how likely a risk is to occur. It's often expressed using terms like low, medium, or high, or on an ordinal scale (e.g., 1 to 5). While a quantitative assessment uses numerical probabilities, likelihood is often more subjective.
• Potential Impact: An assessment of the negative consequences if the risk occurs. This is also typically a qualitative assessment, using terms like negligible, minor, moderate, major, or catastrophic.

2.4.1 Describing Risk Likelihood:

An ordinal scale ranks items in order of magnitude. For risk likelihood, this could be a numerical scale (1 to 5, where 1 is rare and 5 is almost certain) or a descriptive scale (rare, unlikely, possible, likely, almost certain).

2.4.2 Significance of Risk Likelihood:

Risk likelihood is crucial for prioritizing risks. Combined with potential impact, it forms a Risk Matrix (or Risk Diagram). The Risk Matrix visually represents risk magnitude, often categorized into levels (e.g., low, medium, high, extreme).

• Risk Magnitude: Calculated by multiplying risk likelihood by risk severity (impact). This provides a quantitative measure of risk. A threshold can be set to determine acceptable and unacceptable risk levels.

Table 2.1: Likelihood Scale Example

2.4.3 Potential Impact:

Potential impact assesses the consequences of a risk on the bank's objectives. It considers the potential loss or damage.

Table 2.2: Impact Scale Example

| Rating | Potential Impact | Description to