What Is a Risk-Based Capital Requirement? Risk-based capital requirement refers to a rule that establishes minimum regulatory capital for financial institutions. Risk-based capital requirements exist to protect financial firms, their investors, their clients, and the economy as a whole. These requirements ensure that each financial institution has enough capital on hand to sustain operating losses
What Is Risk-Based Deposit Insurance? Risk-based deposit insurance is insurance with premiums that reflect how prudently banks act when investing their customers’ deposits. The idea is that flat-rate deposit insurance shelters banks from their true level of risk-taking and encourages poor decision-making and moral hazard. With risk-based deposit insurance, on the other hand, banks might think twice about
What Is Risk-Based Pricing? Risk-based pricing in the credit market refers to the offering of different interest rates and loan terms to different consumers based on their creditworthiness. Risk-based pricing looks at factors associated with the ability of the borrower to pay back the loan, namely a consumer’s credit score, adverse credit history (if any)
What Is Risk Control? Risk control is the set of methods by which firms evaluate potential losses and take action to reduce or eliminate such threats. It is a technique that utilizes findings from risk assessments, which involve identifying potential risk factors in a company’s operations, such as technical and non-technical aspects of the business
What Is the Risk Curve? The risk curve is a two-dimensional display that generates a visualization of the relationship between the risk and return of one or more assets. The risk curve can contain multiple data points representing various individual securities or classes of assets. It is used to display this data for purposes of
What Is a Risk Discount? A risk discount refers to a situation in which an investor is willing to accept a lower expected return in exchange for lower risk or volatility. The degree to which any particular investor, whether an individual or firm, is willing to trade risk for return depends on the particular risk
Risk financing is the determination of how an organization will pay for loss events in the most effective and least costly way possible. Risk financing involves the identification of risks, determining how to finance the risk, and monitoring the effectiveness of the financing technique that is chosen. Breaking Down Risk Financing Risk financing is designed to
What Is a Risk-Free Asset? A risk-free asset is one that has a certain future return—and virtually no possibility of loss. Debt obligations issued by the U.S. Department of the Treasury (bonds, notes, and especially Treasury bills) are considered to be risk-free because the “full faith and credit” of the U.S. government backs them. Because
What Is Risk-Free Return? Risk-free return is the theoretical return attributed to an investment that provides a guaranteed return with zero risks. The risk-free rate of return represents the interest on an investor’s money that would be expected from an absolutely risk-free investment over a specified period of time. Key Takeaways Risk-free return is a
What Does RiskGrades Mean? RiskGrades (RG) is a trademarked method for calculating the risk of an asset. RiskGrades is a standardized measure for evaluating the volatility of an asset across a variety of asset classes. The scale starts at zero which is the least risky rating. A rating of 1,000 equals the standard market risk
