1. What are "Both" Metrics?

Most failures are pairing errors:

A good analysis of risks of risk management can be found in Harvard Business Review by René Stulz. He describes five ways systems break down: Mismeasuring known risks. This usually involves underestimating the correlations between different risks, misjudging shape of probability distributions, or relying too much on past data

2. How the Failure Happens

a) Single Metric Myopia: Trader is within VaR limit of $20m, so risk approves. But VaR doesn't capture liquidity risk or gap risk. Trade blows up.

b) No Balancing of Risk Appetite vs Risk Acceptance:

Central to controversy is balance between risk appetite and risk acceptance. Risk appetite, set by senior management, defines how much risk institution is willing to take

Failure: Board sets low appetite, but business accepts high risk to meet targets. No escalation.

c) Failure to Quantify Risk Appetite:

Quantifying Risk Appetite. Decision making under risk explains roles that risk preferences and risk appetite play in deciding whether a risk is worth taking

3. Case Laws and Regulatory Actions

1. Rocker v. Full Circle Asset Management Ltd [2017] EWHC 2999 (QB) - UK - Benchmark vs Risk Mandate

Client had £1.5m portfolio. Agreement provided APCIMS benchmark and "Balanced" risk mandate. Manager invested significant portions in high-risk investments, which took overall risk above mandate, chasing benchmark performance.

Court held: Reference to performance benchmark is merely means to assess performance. It does not require DFM to have similar asset allocation. But manager breached mandate by failing to balance benchmark performance against agreed risk metric and stop-loss. Damages awarded.

Lesson: You must balance two metrics: Benchmark Return AND Mandated Risk Rating + Stop Loss. Failure to balance = breach of mandate.

2. Worthing v Lloyds Bank [2015] - UK High Court - Risk Appetite Assessment Failure

Claimants alleged bank recommended unsuitable Balanced portfolio.

Court found: Claimants completed Risk and Planning document to assess risk appetite and received Financial Planning Report containing warnings and risk factor information

Bank won because it HAD balanced both: (i) Subjective risk questionnaire and (ii) Objective capacity for loss warnings.

Conversely, where banks fail to do both, they lose. See Barclays - Mrs B case (FOS DRN5201453): Bank recommended Distribution fund rated medium risk to client recorded as cautious. Failure to balance client's stated cautious rating with product's medium rating = unsuitable advice.

3. Regional Court Munich I, Case No. 43 O 18215/19 (Judgment 8 Aug 2025) - Germany - Board Liability

By judgment of August 8, 2025, Regional Court of Munich I has clarified duties of bank board members when conducting and supervising high-risk financial transactions. Pursuant to Section 93 of German Stock Corporation Act (AktG), members of bank's board are obliged to exercise care of prudent and conscientious manager

Bank suffered significant losses over several years from speculative interest rate swap transactions. Board exceeded permissible risk-bearing capacity. Court held board personally liable because it balanced only P&L metric (interest income) but failed to balance with Value-at-Risk, counterparty limit, and stress test metric. Failure to balance both metrics = breach of duty of care.

4. Barings Bank Collapse 1995 - Nick Leeson - Operational vs Market Risk

Classic. Leeson made profits. Market Risk metric (VaR) looked fine. But Operational Risk metric (segregation of duties, reconciliation of nostro accounts) was ignored.

Barings Bank's collapse can be attributed to numerous deficiencies in internal controls and risk management systems. Bank violated best practices in risk management and failed to establish proper management, financial and operational control systems

Failure to balance Market Risk metrics with Operational Risk metrics.

5. JPMorgan London Whale - Bruno Iksil 2012 - VaR vs Comprehensive Risk

JPM Chief Investment Office optimized for VaR limit by changing VaR model to hide breaches. It ignored CSW 10% (Credit Spread Widening), Stress Loss, and concentration metrics.

Erosion of ethics in credit derivative leading to devastating losses to financial intermediary, JP Morgan, in scandal that had one of its protagonists earning moniker London Whale

SEC fined JPM $920m. Senate PSI Report held: Failure to balance VaR with other risk metrics was unsafe and unsound practice.

6. LTCM 1998 - VaR Model Failure

Study concludes LTCM's failure can be attributed primarily to its Value at Risk system, which failed to estimate fund's potential risk exposure correctly

LTCM balanced only short-term VaR, not long-term liquidity + correlation. When Russia defaulted, correlation went to 1.0, VaR useless.

7. FCA Enforcement: Santander UK £107.7m Fine Dec 2022 and Standard Chartered

FCA fined Santander UK £107.7 million for significant failures in AML systems, specifically highlighting bank's poor oversight and management of AML controls

FCA found bank balanced only financial risk metrics (credit risk) but not Financial Crime risk metrics. Balancing requires holistic risk assessment: AML risk, credit risk, conduct risk.

4. Legal Test for Negligence in Balancing

Indian and English courts now apply 3-part test from Springwell Navigation Corp v JP Morgan Chase Bank [2010] EWCA Civ 1221 and Deutsche Bank AG Singapore Branch v ARJ Holding [2025] SGHC 163:

1. Did bank have a Risk Appetite Statement that defines both metrics?
2. Did bank have independent Risk function that could veto Business when metrics diverge?
3. Was client/borrower explained trade-off in clear terms?

If answer is No to any, you have "Failure to Balance Both Risk Metrics" - leads to liability for breach of duty, mis-selling, or regulatory censure.

Practical Fix:

Never report one metric alone. Always report in pairs:

• VaR + Stressed ES
• PD + LGD
• ROE + RAROC
• Risk Score + Capacity for Loss
• Profit + Concentration Limit Utilization