What is risk aggregation?

AGGREGATION OF RISKS

There has been much discussion of the RAROC and VaR methodologies as an approach to

capture total risk management. Yet, frequently, the risk decision is separated from risk

analysis. If aggregate risk is to be controlled, this or a similar methodology needs to be

integrated more broadly and more deeply into the banking firm.

Both aggregate risk methodologies presume that the time dimensions of all risks can be

viewed as equivalent. A trading risk is similar to a credit risk, for example. This appears

problematic when market prices are not readily available for some assets and the time

dimensions of different risks are dissimilar. Yet, thus far no one firm has tried to address this

issue adequately.