Based on an extract from ‘Mastering Risk Management’ co-authored by RiskLogix’s Head of Consulting Professor Tony Blunden, and John Thirlwell and published by FT Publishing in January 2022.
There are many business benefits to taking a Monte Carlo analytical approach to risk management data as well as the obvious one of allocating the economic capital required to support each business line. This benefit is of course significant and allows senior management and the board to question whether or not underperforming areas of the firm should be resuscitated or sold off. Additionally, of course, allocation of capital to business lines also allows incentives to be given to heads of business lines who are performing well.
Further benefits are the challenge of controls in different risk areas of similar business lines and of similar risks and controls in different business lines. This also allows us to explore how good (or poor, as the case may be) our controls are in terms of preventing the risk from happening and of detecting and correcting it when it does happen. All of these are of course linked to our appetite for risks and our willingness to spend resources in mitigating them.
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