Risk Accounting Standards Board
Accounting for the future
Check out our Whitepapers
We are consolidating our research into whitepapers to showcase how Risk Accounting can help with many of the challenges in today’s regulatory and business environment, in the financial services industry and beyond.
In Memoriam | Peter J. Hughes
Founder & Former Chairman
A chartered accountant and global thought leader in risk accounting, passed away on February 8, 2024, at the age of 73. His career, spanning five decades, was marked by a tireless commitment to innovation, integrity, and transforming the way organizations understand and manage risk.
To read more about Peter’s life and legacy…
About RASB
RASB was established under the auspices of the Durham University Business School to conduct research into methods of quantifying and accounting for non-financial risks. The aim is to conceptualise a next generation accounting method and system “Risk Accounting” as an extension of management (cost) accounting systems.
RASB fulfills the role of risk accounting’s global standards-setter acting as a catalyst for collaboration and knowledge-sharing among industry leaders and fostering a community that drives innovation and best practices in non-financial risk management and accounting across industries.
RASB Constitution
Download the RASB Constitution for your review.
"Op Risk Capital: Don’t Loathe It, Change It!"
In this thought-provoking article published by Starling Insights, author Peter Hughes challenges the traditional approach to operational risk capital in the banking industry.
The article explores the historical context of regulatory capital regimes and highlights the need for a more effective method of quantifying and aggregating operational risks. By examining the challenges faced and proposing a shift in perspective, Hughes advocates for a transformative approach to risk accounting standards.
This article invites readers to explore the potential benefits of embracing change in operational risk capital and its implications for the banking industry.
To read the full article…
Our Whitepapers
Download Our Latest Whitepaper – “Risk Accounting for the Upcoming ESG Regulations”
In the face of increasing regulatory pressures and the need for robust ESG risk management, the Risk Accounting Standards Board (RASB) presents a groundbreaking solution in our latest whitepaper: “The Benefits of Using the Risk Accounting Method in the Context of ESG Regulations.” This comprehensive guide explores how the Risk Accounting method, with its standardized Risk Units (RUs), can transform risk management practices, offering enhanced regulatory compliance, operational efficiency, and transparency. Discover how a collaborative approach involving regulators, academia, financial institutions, and consultancy firms can drive sustainable growth and resilience in the financial sector. Download the whitepaper today and embark on a journey towards innovative and effective ESG risk management.
The Means and Benefits of Tokenizing and Digitally Trading Risk Units
This white paper explains how residual RUs can be transformed into tokenized RUs (TRUs) for sale and trading in specialized blockchain exchanges (“TRU Exchanges”). The distribution of accepted risks in this way eliminates the threat of systemic risk caused by the failure of influential corporations and globally interconnected operating infrastructures. In the highly regulated banking sector, it removes the need for banks to hold eyewatering amounts of inert, unproductive and costly risk capital reserves to protect depositors and, by extension, the global banking system.
Whitepaper | “Operational Risk: A Next Generation Advanced Measurement Approach (AMA-2)”
Assessment vs. Measurement The conventional toolkit employed to counter the operational risk threat is woefully inadequate. It is typically comprised of subjective and non-aggregatable colour-coded risk and control self-assessments and quantitatively modeled estimates...
Accounting Profit vs. Corporate Sustainability
In response to escalating risks that are a constant threat to financial, environmental and social well-being, the investor community is pressing the accounting profession to focus corporate performance reporting on forward-looking sustainability.
Risk accounting enhances corporate reporting by quantifying and accounting for the probable future financial impacts of accumulating risks such as cyber, supply chain, operational, environmental, geopolitical, conduct, fraud, model and many others. In this way accounting profit or loss – the backward-looking or ‘historic’ perspective – is adjusted for the expected losses associated with accepted risks – the forward-looking or ‘future’ perspective.
The result is financial statements whose primary accounting measure of corporate performance and condition is backward- and forward-looking corporate sustainability in place of exclusively backward-looking accounting profit.
Key Metrics
Inherent Risk (IR)
The amount of operational risk in RUs before considering the effects of internal risk mitigation activities and processes (represents maximum exposure to non-financial risk)
Risk Mitigation Index (RMI)
A measure of the effectiveness of internal operational risk mitigating activities and processes on a scale of zero to 100
Residual Risk (RR)
The amount of operational risk in RUs that remains after reducing Inherent Risk by the RMI (represents actual exposure to operational risk)
Risk Accounting’s Critical Features
Standardisation:
The tables, templates and algorithms that comprise risk accounting are fully standardised to ensure the direct comparability of outputs within industry sectors.
Data quality:
A fundamental principle of risk accounting is that significant exposure to risk is created upon the transfer of products and services to external parties.
Thus, risk accounting’s starting point is the controlled and audited daily amount of sales by product registered in official accounting ledgers.
Tokenisation:
The ultimate risk management device is tokenisation that allows organisations to underwrite and distribute their accepted risks to investors.
In accounting terms, the probable future financial impacts of accumulating risks determined by risk accounting are posted to the income (P&L) statement as an expected loss provision with offset to the balance sheet as an expected loss capital reserve.
The exclusive purpose of the reserve is to finance risk mitigation improvements.
This is achieved by converting the reserve into tradable digital risk tokens that can be sold and traded on the open market.
Implementation Lite:
Risk accounting is an extension of management (cost) accounting and, consequently, leverages existing accounting infrastructure and the same accounting data aggregation paths that produce financial statements.
Enhanced Risk & Control Self-Assessment (E-RCSA)
RCSAs that typically use a ‘RAG’ (red, amber, green) assessment metric are enhanced by replacing RAG with a numeric measurement metric thereby enabling the processing of E-RCSAs by risk accounting’s algorithms.
E-RCSA questionnaires are fully standardised for each industry sector and include questions whose response can either be binary (‘yes’ or ‘no’ answer) or require selecting an applicable benchmark from a drop-down box. Each E-RCSA question and benchmark is assigned an expertly calibrated risk mitigation impact factor that is processed by risk accounting’s algorithms dependent upon E-RSCA responses.
Aggregatable:
Risk accounting’s algorithms produce risk analytics based on three sources of input: product risk factors; the volume/value of daily new business booked by product; and the results of E-RCSAs that interact with each product.
Risk analytics are aggregated across the vertical and horizontal dimensions of an organisation by multiple reporting categories such as group, business line, cost centre, risk type, product, customer and geography.
Actionable:
Risk accounting enables the analysis of accepted risks in the aggregate and drilling to the detail to determine causality. The successful implementation of risk mitigation improvements is reflected in revised E-RCSA inputs which, in turn, update risk analytics for the associated risk reduction impacts. In this way, risk accounting incentivises and prioritises risk mitigation improvements.
Portfolio View:
Risk accounting provides a portfolio view of accepted risks making classic portfolio management techniques available to users. They include trending, ranking, limit-setting and monitoring, risk budgeting and monitoring, predictive modelling and benchmarking.
Auditable:
Risk accounting’s algorithms use relatively simple mathematical formulae that are standardised for each industry sector. Auditors can independently recalculate outputs with relative ease.
The three sources of input to risk accounting’s algorithms are auditable:
- Product risk factors are assigned and documented during ‘Product Review & Approval’ and are available for audit inspection.
- The volume/value of daily new business booked by product can be validated against official accounting records.
- Questions in E-RCSA questionnaires are structured so there can only be one right answer for which an audit trail is provided.
Product pricing:
Risk accounting calculates accepted risks for each product.
The opportunity cost of risk capital, calculated using an organisation’s hurdle rate (required rate of return on capital), is allocated to products in proportion to residual risks.
Thus, the opportunity cost of risk capital can be incorporated into each product’s unit cost according to the risks actually accepted. This enhances the information available to support product pricing and the monitoring of profit margins.
RASB Board Members
Steve Bailey
Steve is Chairman and CEO of the Risk Accounting Standards Board and a serial investor in innovative technology-based organizations, along with involvement in academia.
He has over 40 years of experience in senior roles in Finance, Technology, Sustainability, and Security.
He developed the ‘Background Checking’ terminology and techniques for global digital ID verification.
He is a qualified accountant (FCCA) and former ACCA Council Member and technology board advisor to FCA and FASB.
Dr. Tom Butler
Dr. Tom Butler, a Professor at Cork University Business School, led the Governance Risk and Compliance Technology Centre in Ireland from 2013 to 2022. His research focused on AI technologies for regulatory compliance and risk management in financial institutions.
He collaborated with global systemically important banks, UK law firms, the Bank of England, and the Financial Conduct Authority. Dr. Butler also served as a member of the Expert Group on Regulatory Obstacles Financial Innovation at the European Commission.
His ongoing research involves regulatory and operational risk, as well as cyber resilience, in collaboration with professional services firms in the UK and Europe.
Dennis Philip
Dennis is a Professor in Finance at the Durham University Business School and Director of its Centre for Banking, Institutions and Development (CBID) research group. He holds a PhD in Finance from Cass Business School. His research contributes to the understanding of the interactions between firm characteristics and financial markets. His research has been funded by financial companies, central banks and recently from the European Commission.
Paul Costea
Paul is a seasoned marketing and sales professional with a diverse background covering advertising, media, business consulting, and over 20 years in enterprise software solutions, currently acting as RASB’s COO.
Paul is a law school graduate with a master of business administration from the Romanian Academy of Economic Studies and a Professional Diploma in Management from Open University UK.
The Risk Accounting Book - Available Now!
RASB has successfully codified a prototype risk accounting method and system. It has been laboratory tested and is ready for live simulation primarily through proofs-of-concept carried out in organisations’ operating environments.
When fully accepted, risk accounting will be an integral part of accounting and reporting systems: colour-coded ‘RAG’ (red, amber, green) assessments will be replaced by aggregatable risk analytics; expected losses associated with accepted non-financial risks will be accounted for and reported in financial statements; and the facility for organisations to underwrite and distribute accepted risks through tokenisation will be created.
This new book by Peter Hughes (RASB’s founding chairman) is available on Amazon and other reputable booksellers globally. It’s a comprehensive guide to the risk accounting method with worked examples of the method’s application and sample reports.
News & Articles
The Silicon Valley Bank crisis highlights the need for Next-Generation Risk Accounting
Much has been written about the Silicon Valley Bank (SVB) collapse. The consensus view is that inadequate risk management was the cause. However, we mustn’t overlook the fact that SVB’s 2022 annual report (Form 10K) showed consolidated income before tax for the year of $2.2 bn and rated the bank “well capitalized” under predefined capital rules. So, a bank that was reported as financially sound at the end of December was closed two months later due to its insolvency. As Peter writes in his article, “Backward-looking financial statements that require only the disclosure of accepted risks without accounting for them are obviously of little use or relevance”. So, not only risk managers but also accountants need to “Heed SVB’s Risk Lessons” and establish next generation risk accounting to address the quantification of non-financial risks and accounting for the associated expected losses.
Risk Accounting, Modeling and Nonfinancial Risk: An Argument for Better Integration – GARP Article
GARP.org article by Peter Hughes Environmental...
Whitepaper | “Operational Risk: A Next Generation Advanced Measurement Approach (AMA-2)”
Assessment vs. Measurement The conventional...
Testing the inherent predictive ability of the Risk Unit (RU), a new metric to express all forms of non-financial risk in banks
In today’s interconnected financial landscape, banks face unprecedented operational risks. Traditional risk assessment methods often fall short, leaving institutions vulnerable to catastrophic losses. Enter the Risk Unit (RU), a groundbreaking metric introduced by the risk accounting method, tested by Peter Hughes and Mahmoud Marzouk for predictive capabilities. This new approach quantifies all forms of operational risk, offering a predictive tool that could revolutionize risk management in banks. Discover how the RU enhances risk oversight, aligns financial performance metrics, and supports proactive risk mitigation strategies in our latest blog post.
OpRisk Capital Chess: Banks Lose First Match – GARP Article
GARP.org article by Peter Hughes When the Basel...
Operational Risk Metrics: Seeing Is Believing – GARP article
GARP.org article by Peter Hughes Tests conducted...
Where Next with Operational Risk? – GARP article
Observation and measurement issues pose...
The Rise of a Complexitocracy – GARP Article
Can accounting help restore simplicity and...
Is accounting to blame for the pandemic? – PRMIA Article
by Peter j. Hughes, published by PRMIA in the...
Research Update: A Common Metric for Non-Financial Risks
In conjunction with the Durham University...
We Welcome Paul Costea as Chief Operating Officer of RASB
We are pleased to announce the appointment of...
Accounting’s Operational-Risk Missing Link – GARP Article
A void that limits the influence of risk...