Banking and Prudential Risk
Definition
Banking and prudential risk covers the capital, liquidity and balance-sheet disciplines that determine whether a bank can absorb losses and meet obligations under stress. The regulatory architecture — Basel standards implemented through regional law and supervisory expectation — sets the minimum. Sound management practice sets the actual operating standard.
The core processes are the internal capital adequacy assessment process, the internal liquidity adequacy assessment process, interest-rate and credit-spread risk in the banking book, expected-credit-loss measurement, and recovery planning.
Why it matters
- Capital and liquidity adequacy are the two constraints that decide whether a bank continues to operate. Everything else is optimisation within those constraints.
- Regulatory processes consume substantial resources. Institutions that treat them as compliance exercises pay the cost twice — once in production, once in poor decisions from unused analysis.
- Behavioural assumptions — deposit stability, prepayment, non-maturity repricing — often move results more than the interest-rate scenarios applied to them.
Professional focus of Jonas Osman
- Connecting ICAAP and ILAAP to the actual planning cycle rather than running them as parallel documents.
- Interest-rate and credit-spread risk in the banking book, including behavioural modelling and its validation.
- IFRS 9 staging, scenario weighting and the governance of post-model adjustments.
- Funds transfer pricing as the mechanism that makes balance-sheet risk visible in business-line economics.
Key methodologies
- Economic value and earnings measures. EVE and NII perspectives run in parallel, with explicit reconciliation of why they can point in opposite directions.
- Behavioural modelling. Non-maturity deposit repricing, prepayment and early-redemption models with sensitivity ranges.
- Cash-flow ladders and survival horizons. Contractual and behavioural liquidity gaps under baseline and stressed conditions.
- PD, LGD and EAD modelling. Point-in-time and through-the-cycle calibration with forward-looking scenario overlays.
- Integrated stress testing. Consistent macroeconomic narratives applied simultaneously to capital, liquidity and earnings.
Practical management applications
- Capital planning and dividend capacity assessment across a multi-year horizon.
- Liquidity buffer sizing beyond the regulatory ratios, based on institution-specific survival horizons.
- Hedging strategy for the banking book informed by both value and earnings sensitivities.
- Recovery-plan trigger calibration that gives management usable lead time.
- Pricing and funds transfer pricing that reflect the liquidity and capital cost of each product.
Governance and limitations
- Regulatory references change. Any framework should be checked against the current official text of the applicable standard before reliance.
- Behavioural models estimated on a long benign period will understate sensitivity in a rate shock.
- Post-model adjustments and overlays require the same documentation and challenge as the models they adjust.
- Scenario severity should be justified against historical experience and forward-looking judgement, not chosen for the answer it produces.