BRP key terms

The estimated likelihood that a borrower will fail to meet a debt obligation within a given horizon, usually one year. It is a core input to credit risk capital and pricing models.

The share of exposure expected to be lost if a borrower defaults, after accounting for recoveries and collateral. Expressed as a percentage of exposure at default.

The estimated outstanding amount owed by a borrower at the moment of default, including drawn balances and expected drawdowns on committed facilities. Used together with PD and LGD.

The proportion of an undrawn commitment expected to be drawn down before a borrower defaults. It converts off-balance-sheet exposure into an estimated exposure at default.

The average credit loss anticipated over a horizon, commonly computed as PD multiplied by LGD multiplied by EAD. It is covered by pricing and provisions rather than capital.

The portion of credit loss beyond the expected average, arising from volatility in defaults and recoveries. It is the main risk absorbed by regulatory and economic capital.

The movement of a borrower's credit rating from one grade to another over time. Downgrades can raise capital requirements and trigger collateral or covenant consequences.

A list of borrowers showing early signs of financial deterioration who require closer monitoring. Placement often prompts enhanced review, stricter covenants, or higher provisioning.

A concession granted to a borrower in financial difficulty, such as reduced payments or extended maturity. Forborne exposures are typically classified and monitored separately because of elevated risk.

An exposure that is past due beyond a set threshold, usually 90 days, or where the borrower is unlikely to repay in full. It signals material credit deterioration.

The risk of loss arising from large exposure to a single counterparty, sector, or correlated group. It can make a portfolio more fragile than diversified lending would suggest.

Techniques such as collateral, guarantees, and credit derivatives that reduce potential credit losses. Eligibility rules determine whether they lower regulatory capital requirements.

A statistical estimate of the maximum loss a portfolio could incur over a set horizon at a given confidence level. It is widely used but says nothing about losses beyond that threshold.

The average loss expected in the worst outcomes beyond the Value at Risk threshold. It captures tail risk that VaR ignores and is favored in modern market risk capital rules.

Analysis of portfolio losses under severe but plausible scenarios, such as sharp rate moves or market crashes. It complements statistical models by exploring extreme conditions.

Evaluating the impact of specified hypothetical events, often historical or forward-looking, on positions and capital. Unlike probability models, it asks what happens if a scenario occurs.

Comparing model-generated risk estimates with actual realized outcomes to check model accuracy. Persistent exceptions suggest the model understates risk and may require recalibration or capital add-ons.

Sensitivity measures for option positions, such as delta, gamma, vega, and theta, showing how value changes with price, volatility, or time. They underpin hedging and limit setting.

Adjusting a position in the underlying asset to offset the delta sensitivity of an option book. It reduces directional exposure but leaves other risks such as gamma and vega.

The pattern where implied volatility differs across strike prices rather than staying constant. It reveals that simple constant-volatility pricing models misstate out-of-the-money option values.

Valuing positions at current market prices or observable inputs rather than historical cost. It gives timely risk and profit figures but can be unreliable in illiquid markets.

Valuing positions using internal models and assumptions when market prices are unavailable or unreliable. It introduces valuation uncertainty and requires independent review and reserves.

The risk that offsetting positions do not move in perfect tandem because their prices are linked to different reference rates or markets. Hedges can therefore leave residual exposure.

The exposure of earnings or economic value to changes in interest rates. It affects banking books through repricing gaps and trading books through price sensitivity.

The risk of being unable to meet obligations as they fall due, or of only being able to trade at a large discount. It combines funding risk and market liquidity risk.

The risk of loss from inadequate or failed internal processes, people, systems, or external events. It includes legal and compliance failures but excludes strategic and reputational risk in the standard definition.

A metric tracked to give early warning of rising operational risk, such as failed trades or system outages. Thresholds trigger escalation before losses become material.

A structured process where business units identify risks, assess controls, and rate residual exposure. Results feed risk registers and inform where remediation effort is most needed.

Records of actual operational losses, including amount, cause, and business line. The data supports capital modeling, trend analysis, and control improvements.

An incident that could have caused a loss but did not, or was caught before impact. Recording near misses reveals control weaknesses before real losses occur.

Documented procedures for maintaining or restoring critical operations during disruption, such as outages or disasters. It sets recovery priorities, roles, and tested recovery time objectives.

The risk that relying on third parties for services harms quality, continuity, or compliance. It requires due diligence, contractual safeguards, and ongoing oversight of providers.

The risk of adverse outcomes from decisions based on flawed or misused models. It arises from data errors, wrong assumptions, implementation faults, or use outside intended scope.

The amount and type of risk an institution is willing to accept in pursuing its objectives. It is expressed through statements and limits that guide business and risk decisions.

A governance model where business units own risk, a separate risk function oversees it, and internal audit provides independent assurance. It clarifies accountability across the organization.

An independent function that assesses the effectiveness of controls and governance across the institution. It reports to the board or audit committee, separate from management.

A measure of a bank's capital relative to its risk-weighted assets, showing its ability to absorb losses. Regulators set minimum levels to protect depositors and stability.

Exposures adjusted for credit, market, and operational risk to reflect their riskiness. They form the denominator of capital ratios and determine how much capital is required.

A simple measure of capital divided by total unweighted exposure, without risk adjustment. It acts as a backstop to risk-weighted capital and limits excessive balance-sheet growth.

A requirement that a bank hold enough high-quality liquid assets to survive a 30-day stress outflow. It targets short-term liquidity resilience.

A requirement that long-term assets be funded with sufficiently stable liabilities over a one-year horizon. It limits reliance on short-term wholesale funding.

The minimum capital requirements for credit, market, and operational risk under the Basel framework. It sets standardized or model-based rules applied to all banks.

The supervisory review process requiring banks to assess risks not fully captured by Pillar 1 and hold additional capital where needed. It covers firm-specific and concentration risks.

Public disclosure requirements designed to let markets assess a bank's risk profile and capital. It promotes transparency and market discipline alongside regulatory minimums.

The process of verifying client identity and understanding their business and risk profile. It is a foundation of anti-money-laundering controls and ongoing monitoring.

Laws, rules, and controls aimed at preventing the movement and concealment of criminal proceeds through the financial system. It includes monitoring, reporting, and record-keeping duties.

A filing made to authorities when a transaction or relationship appears linked to criminal activity. Filing is typically protected by safe-harbor rules and must not tip off the client.