Risk Limit is a very general and widely used risk and portfolio management technique. A limit is essentially one or more numerical thresholds defined in relation with a specific Risk Exposure. As per internal Risk Policy limits aim to contain risk exposures below an acceptable level.
Credit Risk Limits
In the context of Credit Risk management, risk limits can be classified into the following types:
- Exposure limits that constrain the individual or total amount of credit exposure in terms of e.g., loan balances, credit derivative notional amounts etc.
- Tenor limits that constrain the individual or average maturity of the exposure / portfolio
- Rating based limits that constrain the individual or average rating or expected loss of the exposure / portfolio
- Volatility / Capital based limits that constrain the contribution of an exposure to unexpected losses
Limits can be set at a variety of hierarchies: total, sectoral, regional, by business line, Single Obligor Exposure limits etc.