DNB’s total risk assessment model

Understanding and managing financial risk is crucial for banks to ensure stability and regulatory compliance. At NR, we develop statistical models that provide realistic risk assessments one year in advance, helping financial institutions evaluate capital requirements and manage risk more effectively.

Risk models for Norwegian financial groups

Our collaboration with DNB began in 2000 with the development of a statistical model for capital requirement calculations. Since then, the model has undergone multiple revisions and gained recognition in the financial sector, leading to similar models for other banking groups, including Sparebanken Sogn og Fjordane, Sparebanken Sør, Sparebanken Møre, and Sandnes Sparebank, as well as the Sparebank1 Alliance and Gjensidige Bank.

Key risk categories in banking

Our risk modelling approach assumes that a bank’s total risk can be divided into three main categories:

• Credit risk – the risk of borrowers defaulting on their loans.
• Market risk – the impact of fluctuations in interest rates and stock prices.
• Operational risk – risks related to internal processes, systems, and human factors.

Each risk category is modelled using tailored methodologies. Credit risk follows the Internal Ratings-Based (IRB) approach from Basel II. Market risk is assessed by simulating future interest rates and stock prices, while operational risk is primarily evaluated using expert knowledge.

In addition to robust models for each risk category, a key challenge lies in accurately capturing the interdependencies between them. Simulation-based methodologies play a crucial role in achieving this. By modelling the interaction between credit, market, and operational risk, banks can improve the precision of their risk assessments and allocate capital accordingly.

To learn more about this project, please contact: