Risk Aggregation denotes a stage of the Risk Measurement process where different risks are considered jointly in order to obtain a integrated risk profile.
Aggregated risks may be variations of a given Risk Type, in which case the process is named Intra-Risk Aggregation (for example different types of Credit Risk) or clearly distinct types, in which case the process is named Inter-Risk Aggregation.
Banks and Insurance firms will typically perform risk aggregation under the Economic Capital frameworks. For banking supervisors, the SREP process typically includes a review of firms’ internal risk aggregation methods under the Internal Capital Adequacy Assessment Process (ICAAP) required for Pillar 2 of the Basel II framework
Issues and Challenges
- Effective aggregation of risks requires among others comprehensive and consistent Risk Data Aggregation across different risk types
- Establishing the degree of Risk Diversification between distinct risk types is subject to technical and conceptual difficulties
- BCBS, Developments in Modelling Risk Aggregation, 2010