CrTAS key terms

A formal document approved by the board that states how much risk the institution is willing to accept in pursuit of its objectives, expressed through qualitative principles and quantitative limits.

The maximum level of risk an institution can absorb before breaching capital, liquidity, or regulatory constraints, independent of management's willingness to take that risk.

A measurable threshold, such as a maximum exposure, loss, or ratio, that translates risk appetite into operational boundaries monitored by the risk function.

A governance structure in which business units own risk, an independent risk and compliance function oversees it, and internal audit provides assurance to the board and its committees.

The documented process for reporting a limit or policy violation to senior management and the board, including remediation timelines, root-cause analysis, and any temporary approval to operate outside the limit.

A forward-looking metric that signals rising exposure to a specific risk before losses occur, such as failed trade rates or staff turnover in control functions.

An estimate of the maximum loss a portfolio could suffer over a defined horizon at a given confidence level, typically computed from historical or simulated return distributions.

The average loss in the worst tail of the distribution beyond the Value at Risk threshold, making it sensitive to the severity of extreme losses rather than only their frequency.

A Value at Risk method that revalues the current portfolio against a rolling window of past market moves, preserving empirical correlations without assuming a normal distribution.

Comparing forecast losses from a risk model with actual profit and loss to count exceptions, thereby testing whether the model's confidence level is calibrated correctly.

Sensitivity measures for option positions, such as delta, gamma, vega, and theta, that quantify how value changes when the underlying price, volatility, or time to expiry moves.

The risk that offsetting positions do not move in perfect tandem because the hedged exposure and the hedging instrument are priced off different but related reference rates or markets.

The exposure of non-traded assets and liabilities, such as loans and deposits, to changes in interest rates, typically measured through repricing gaps and economic value sensitivity.

The difference between assets and liabilities that reprice within a given time bucket, indicating how net interest income responds to a shift in market rates.

The difference between the weighted average duration of assets and liabilities, used to estimate how a bank's economic value of equity changes when interest rates move.

The likelihood, over a specified horizon such as one year, that an obligor will fail to meet its contractual payment obligations, usually estimated from ratings or statistical models.

The share of an exposure expected to be lost if a borrower defaults, after accounting for recoveries, collateral, and workout costs.

The estimated outstanding amount owed at the moment of default, including drawn balances and a conversion factor applied to undrawn commitments.

The market value adjustment to derivative positions reflecting the possibility that a counterparty defaults before the trade matures, effectively pricing counterparty credit risk.

A situation where exposure to a counterparty increases at the same time the counterparty's likelihood of default rises, because both depend on a common risk factor.

A high-percentile estimate of how large a derivative exposure could grow at a future date under adverse market moves, used to set counterparty credit lines.

A change in an obligor's credit rating or internal risk grade, which alters capital requirements and can trigger collateral or covenant consequences even without a default.

A contractual arrangement allowing offsetting positions with the same counterparty to be combined into a single exposure in the event of default, reducing credit risk.

A regulatory ratio comparing a bank's stock of high-quality liquid assets with its projected net cash outflows over a thirty-day stress period, required to exceed a minimum threshold.

A structural ratio requiring available stable funding to cover required stable funding over a one-year horizon, discouraging heavy reliance on short-term wholesale funding.

Cash and securities that can be sold or pledged quickly with little loss of value during stress, forming the numerator of the liquidity coverage ratio.

The ability to fund payment and settlement obligations as they fall due during the business day, before end-of-day netting and funding flows arrive.

Reliance on a small number of large depositors or wholesale counterparties, which raises the risk of abrupt withdrawal and is monitored through concentration limits.

The assumed percentage of deposits that leaves the bank during a stress scenario, differentiated by depositor type and insurance status in liquidity stress testing.

The percentage reduction applied to the market value of collateral when calculating how much funding or credit it can support, reflecting price volatility and liquidation risk.

A discount applied to pledged collateral in secured lending or derivatives margining so that a fall in its price does not leave the lender undercollateralized.

An internal register of operational incidents, including near misses, that records root causes and losses and supports capital modeling and control improvement.

Independent review of a model's conceptual soundness, data quality, implementation, and performance, confirming it remains fit for its intended use.

The potential for adverse consequences from decisions based on incorrect or misused model outputs, including flawed assumptions, bad data, or improper implementation.

A payment system that settles each transfer individually and immediately in central bank money, eliminating settlement lag but requiring sufficient intraday funding.

The risk that one leg of a foreign exchange transaction is paid away while the counterparty fails before delivering the other leg, leaving the payer exposed to full principal loss.

A settlement mechanism that links two currency legs so that one payment is released only when the other is confirmed, removing principal risk in foreign exchange settlement.

A coherent set of adverse but plausible assumptions about markets, macroeconomy, or idiosyncratic events used to estimate losses, capital needs, and liquidity outflows.

An exercise that identifies the combinations of events or loss levels that would exhaust capital or liquidity, working backwards from failure rather than forwards from a scenario.

Capital held above regulatory minimums, comprising conservation and countercyclical buffers, that can absorb losses during stress without breaching minimum requirements.