Inherent Risk

Inherent risk is usually defined as the risk that exists in each line of business without consideration of the level of management control in place.

• Inherent risk results from business choices (e.g. originating or buying subprime mortgage loans)
• Inherent risk level may change with changes in the economy and other non-controllable factors (e.g., check fraud increases, bank robberies increase, mortgage defaults increase)
• A high degree of inherent risk is not necessarily negative, nor is having a low level of inherent risk necessarily positive
• The Bank's strategic business objectives help determine what is an acceptable level of inherent risk
• The level of inherent risk implies the risk strategies to be employed, and controls and monitoring procedures to be used (e.g., riskier approaches need more monitoring and more control)

First published on BankersOnline.com 11/17/08