A Cartography of Banking Risks

Sergio Scandizzo

In the previous chapter, we argued that it was important to revisit the purpose of the risk management function. In this chapter and the subsequent three, we will discuss some issues that are not usually, or only marginally, treated in risk management reports but which are nonetheless key to a risk management function focused on preventing distress rather than on improving performance. We will start with a look at the nature of banking risks and how they can be mapped through a “cartography of risks”, a process whereby all the risks faced by a bank are identified and mapped to the relevant processes and activities. We will then discuss a different approach to the assessment and reporting of such risks.

THE NATURE OF BANKING RISKS

In what is arguably one of the most important books of the 17th century, La Logique ou l’Art de Penser, we find the following statement: “Fear of harm ought to be proportional not merely to the gravity of the harm, but also to the probability of the event”. The seemingly incontrovertible logic of this thesis lies at the heart of all modern approaches to risk management: from the naïve and hyper-prescriptive COSO¹¹ Committee of Sponsoring Organizations