Strategic Risk

Strategic risk is the risk to earnings or capital from poorly conceived business plans
and/or weak implementation of strategic initiatives. Before achieving material participation
in the credit derivatives market, management should assess the impact on
the bank’s risk profile and ensure that adequate internal controls have been established
for the conduct of all trading and end-user activities. For example, management
should assess:
Ω The adequacy of personnel expertise, risk management systems, and operational
capacity to support the activity.
Ω Whether credit derivative activity is consistent with the bank’s overall business
strategy.
Ω The level and type of credit derivative activity in which the bank plans to engage
(e.g. dealer versus end-user).

Ω The types and credit quality of underlying reference assets and counterparties.
Ω The structures and maturities of transactions.
Ω Whether the bank has completed a risk/return analysis and established performance
benchmarks.
Banks should consider the above issues as part of a new product approval process.
The new product approval process should include approval from all relevant bank
offices or departments such as risk control, operations, accounting, legal, audit, and
line management. Depending on the magnitude of the new product or activity and
its impact on the bank’s risk profile, senior management, and in some cases the
board, should provide the final approval.