The Risk Taxonomy

Before risk can be measured it must be named. The taxonomy separates market risk, the danger that prices move against you; credit risk, that obligors fail to pay; liquidity risk, that positions cannot be exited near quoted prices; operational risk, that processes, systems, or people fail; and model risk, that the measurements themselves are wrong. Each type hides somewhere different, from option books and loan portfolios to funding desks and spreadsheets, and each has its own owner, limits, and capital charge. The nodes that follow walk this list in learning order, beginning where measurement is easiest, with market risk.