Tag: Unexpected Loss

The Hidden Risk in Commercial Lending

Managing credit risk - unexpected loss
MANAGING CREDIT RISK

Most risk managers are intimately familiar with the expected loss for credit and interest rate risk. However, fewer risk managers are familiar with the concept of unexpected loss.  For commercial banks, it is the unexpected loss that is more important for lending decisions and long-term profitability.  We will outline how unexpected loss manifests itself in lending decisions and what commercial lenders must know to safeguard against unexpected loss for credit and interest rate risk.

 

This Is The Biggest Risk That You Are Likely Missing At Your Bank

Managing Unexpected Losses

Risk managers get in trouble when they start measuring risk based on the expectation of loss or exposure. Expected loss is just part of the risk story.  Be it credit risk, liquidity risk, interest rate risk or operational risk, exposure for a bank must include the unexpected exposure, not solely the expected loss. Expected losses are priced into a contract and banks are typically compensated upfront for these risks. It is the unexpected loss that must be protected by capital and causes the most amount of damage and bank failure.

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