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We will post your question or comment. Questions will be answered by staff members of the Community Affairs Department of the Federal Reserve Bank of St. Louis. But if you think you have a better answer, we will post that, too. Your name and e-mail address will not be used unless you want us to post them.

April 08, 2002

Q

What is risk?

A

Risk is the degree of probability that there will be a loss when working on a community development activity.

It is important to remember that risk will always be present and that loss can be monetary or non-monetary. Examples of risk include lost revenue, fraud, unsound management decisions, loss of assets, increased costs, violations of regulations, legal action, damaged reputation and disruption of operations.

In community development finance, several tools are used to lessen monetary risks associated with a project. These include equity, matched funding from other sources and guarantees and insurance available from government sources.

Approaches to lessen non-monetary risks include partnerships, specialized expertise, operating controls and accounting standards.

Questions to help identify risks:
1. What has to happen for us to be successful?
2. What regulations apply to our project?
3. What could go wrong or happen to cause us to fail?
4. What opportunities could we miss?
5. How could fraud occur or assets be stolen?