Risk Taxonomy Development Guide
How to develop and maintain a comprehensive risk taxonomy that enables consistent risk identification and reporting.
Developing a Risk Taxonomy
What is a Risk Taxonomy?
A risk taxonomy is a structured classification system that organizes risks into categories and subcategories, enabling consistent identification, assessment, and reporting across the organization.
Benefits of a Risk Taxonomy
- Common language for risk discussions
- Consistent risk identification
- Comparable assessments across units
- Aggregation for portfolio view
- Regulatory alignment
Design Principles
1. Mutually Exclusive
Each risk belongs to only one category
2. Collectively Exhaustive
All risks can be classified
3. Appropriate Granularity
- Too broad: Loss of detail
- Too granular: Administrative burden
4. Aligned with Business
Reflects how organization thinks about risk
Sample Risk Taxonomy Structure
Level 1: Strategic Risks
- Business model risk
- Competitive risk
- Reputation risk
- Strategic execution risk
Level 1: Financial Risks
- Credit risk (counterparty, concentration)
- Market risk (interest rate, FX, equity)
- Liquidity risk (funding, market liquidity)
- Investment risk
Level 1: Operational Risks
- Process risk
- People risk
- Technology risk
- External event risk
Level 1: Compliance Risks
- Regulatory risk
- Legal risk
- Conduct risk
- Financial crime risk
Level 1: Technology Risks
- Cyber security risk
- Data risk
- Infrastructure risk
- Third-party technology risk
Development Process
Step 1: Research
- Industry standards (Basel, Solvency II)
- Peer organizations
- Historical incidents
Step 2: Draft Structure
- Top-down from strategic objectives
- Bottom-up from known risks
- Typically 4-6 Level 1 categories
Step 3: Stakeholder Input
- Business unit validation
- Risk function review
- Executive approval
Step 4: Implementation
- Training and communication
- System configuration
- Mapping existing risks
Step 5: Maintenance
- Annual review
- Emerging risk updates
- Post-incident adjustments
Integration with Risk Register
- Each risk tagged to taxonomy
- Enables aggregation and reporting
- Supports risk appetite alignment