When is residual risk determined?

Residual risk assessments are conducted after determining the inherent risk in a portfolio, because banks calculate residual risk based on inherent risks. Banks commonly assess residual and inherent risk in their overall risk assessment report.

Banks assess residual risk according to inherent risk and variables that exist outside their market system, while inherent risks are determined according exclusively to inter-market variables. Banks generate overall risk assessment reports cyclically in order to monitor the amount of risk they take on and thus maintain a healthy portfolio. The assessment of residual risk demands greater scrutiny of inherent risk, so smaller institutions often avoid performing this assessment.