Rewarded risk and Procyclicality: Difference between pages

From ACT Wiki
(Difference between pages)
Jump to navigationJump to search
imported>Doug Williamson
(Link with Strategic analysis and Shareholder value pages and mention 'strategic plan' explicitly.)
 
(Add definitions. Sources: linked pages.)
 
Line 1: Line 1:
Rewarded and unrewarded risk can be a useful way to analyse risks.  
1. ''Bank supervision - capital adequacy - leverage.''


It can indicate whether a particular risk is a legitimate risk for the organisation (and consistent with the organisation’s strategic plan) or not.
The tendency of financial systems to amplify fluctuations in the economic cycle.


An example of a rewarded risk is a capital investment decision, such as acquiring a business or a new machine, launching a new product and so on.


Such an investment will be made because there is a reasonable expectation of an acceptable net positive return within the organisation's strategic plan, and hence an expectation of an increase in shareholder wealth.
:<span style="color:#4B0082">'''''Interaction and amplification'''''</span>


:"Herd behaviour has long been known to be an essential feature of financial markets.
:More subtly, individual reactions, by themselves rational, can, by the virtue of their mutual interaction, produce strong amplification effects.
:A broader definition of procyclicality would thus encompass three components, which cannot easily be distinguished in real life:
::(1) fluctuations around the trend
::(2) changes in the trend itself and
::(3) possible cumulative deviations from equilibrium value.
:This points to the policy challenges regulators face.
:They have to try and identify when pure cyclical fluctuations morph into something different: either a change in the trend itself or the start of a cumulative process."
:''Jean-Pierre Landau, Deputy Governor of the Bank of France, BIS Review 94/2009.''
2.  ''Bank supervision - capital adequacy - leverage - risk management.''
The degree to which a particular financial institution is at risk from the effects of procyclical fluctuations, directly or indirectly.
3.  ''Risk - risk management.''
Similar effects in non-financial sectors of the economy, or the degree of risk to which a particular non-financial organisation is exposed to procyclical risks.




== See also ==
== See also ==
* [[Return]]
* [[Bank]]
* [[Shareholder value]]
* [[Bank supervision]]
* [[Strategic analysis]]
* [[Basel III]]
* [[Unrewarded risk]]
* [[Buffer]]
* [[Capital]]
* [[Capital adequacy]]
* [[Capital buffer]]
* [[Countercyclical]]
* [[Countercyclical buffer]]
* [[Cumulative]]
* [[Cyclical]]
* [[Deviation]]
* [[Economy]]
* [[Equilibrium]]
* [[Herd behaviour]]
* [[Leverage]]
* [[Procyclical]]
* [[Prudential]]
* [[Regulator]]
* [[Risk]]
* [[Risk management]]
* [[Supervision]]
* [[Total Loss Absorbing Capacity]]  (TLAC)
* [[Trend]]


[[Category:Financial_risk_management]]
[[Category:Accounting,_tax_and_regulation]]
[[Category:Financial_products_and_markets]]
[[Category:Identify_and_assess_risks]]
[[Category:Investment]]
[[Category:Long_term_funding]]
[[Category:Manage_risks]]
[[Category:Risk_reporting]]
[[Category:Risk_frameworks]]
[[Category:The_business_context]]

Revision as of 23:20, 21 November 2023

1. Bank supervision - capital adequacy - leverage.

The tendency of financial systems to amplify fluctuations in the economic cycle.


Interaction and amplification
"Herd behaviour has long been known to be an essential feature of financial markets.
More subtly, individual reactions, by themselves rational, can, by the virtue of their mutual interaction, produce strong amplification effects.


A broader definition of procyclicality would thus encompass three components, which cannot easily be distinguished in real life:
(1) fluctuations around the trend
(2) changes in the trend itself and
(3) possible cumulative deviations from equilibrium value.


This points to the policy challenges regulators face.
They have to try and identify when pure cyclical fluctuations morph into something different: either a change in the trend itself or the start of a cumulative process."


Jean-Pierre Landau, Deputy Governor of the Bank of France, BIS Review 94/2009.


2. Bank supervision - capital adequacy - leverage - risk management.

The degree to which a particular financial institution is at risk from the effects of procyclical fluctuations, directly or indirectly.


3. Risk - risk management.

Similar effects in non-financial sectors of the economy, or the degree of risk to which a particular non-financial organisation is exposed to procyclical risks.


See also

Retrieved from ‘https://wiki.treasurers.org/w/index.php?title=Rewarded_risk&oldid=53699’