When is residual risk determined?


Quick Answer

Residual risk assessments are conducted after determining the inherent risk in a portfolio, because banks calculate residual risk based on inherent risks. Banks commonly assess residual and inherent risk in their overall risk assessment report.

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Full Answer

Banks assess residual risk according to inherent risk and variables that exist outside their market system, while inherent risks are determined according exclusively to inter-market variables. Banks generate overall risk assessment reports cyclically in order to monitor the amount of risk they take on and thus maintain a healthy portfolio. The assessment of residual risk demands greater scrutiny of inherent risk, so smaller institutions often avoid performing this assessment.

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