Do you really know the current risk profile of your balance sheet?
Understanding the risks associated with your balance sheet is critically important. How can you make the decisions necessary to effectively manage potential risk and maximize earnings if you don’t know what your risk profile looks like? It may sound obvious, but far too many institutions are making decisions without having a firm grasp of their current risk profile.
Potential risk can present itself in many forms. DCG’s comprehensive or “Wholistic” approach looks at more than just interest rate risk. Recent regulatory pronouncements make it clear that capital and liquidity risk must be measured, understood and factored into the decision-making process as well. Each risk does not exist in a vacuum.
It’s important to realize that a model alone won’t tell you if you should be concerned about your potential risks or what aspects of your profile could be putting your CAMELS ratings at risk. It takes many factors beyond the model to pull this together.
As part of an ongoing process, institutions need to be assessing their exposure to a variety of potential risks. A thorough, documented process is the only way to accurately assess the risks inherent in your institution.