Risk sensitivity is a characteristic of effective risk management, where control mechanisms are aligned with the risks that actually exist.
This means that companies and organizations should be able to identify, measure and evaluate their risks in order to take appropriate measures to manage and control them. Risk-sensitivity is also an important principle for the prudential regulation of banks, as it can ensure that banks' capital requirements are adequate and reflect actual risks.
Risk-sensitive management comprises various elements, such as appropriate risk measurement and valuation, adequate risk management, and regular review and adjustment of risk strategy and management. Adequate risk measurement and assessment includes the identification of the various types of risk, their quantification and evaluation, and the assessment of the interactions between the various risks. Adequate risk management includes the implementation of risk limits and risk controls as well as monitoring and reviewing the effectiveness of these measures.
Prudential regulation that focuses on risk sensitivity aims to ensure that banks' capital requirements are adequate and reflect actual risks. In this context, banks are to identify, measure and manage their risks on the basis of a risk assessment and take appropriate measures to address the risks. In doing so, capital requirements are to be calculated in such a way that they reflect the actual risks. The aim is to ensure that banks have sufficient own funds to absorb unforeseen losses and continue their business activities.
