Cost Risk is the risk that product origination costs (e.g Credit Origination) for achieving a planned amount of business will materially deviate from the expected amounts due to external or internal factors. The cost metric will be primarily referencing variable staff costs but possibly also other production related expenditure
Cost risk can be both due to both internal and external factors:
- Internal factors include the ability to control variable costs without demotivating or losing staff
- External factors comprise primarily of the competitive landscape versus the remuneration of staff
Issues and Challenges
Formal modelling of cost risk (and its components) is in a rather nascent stage. It is not one of the recognized regulatory risk types that attract capital requirements.