Reading a Basel paper on recommendations on internal economic capital models. One of the recommendations says members of the bank's board should be able to demonstrate understanding of the difference between
gross (stand alone) and net enterprise wide (diversified) risk when they define and communicate measures of the bank’s risk appetite on a net basis
Question: Are they talking about a diversification benefit when aggregating risks firm wide ? (Also, I'm not sure if the terms are gross enterprise wide risk and net enterprise wide risk or gross risk and net enterprise wide risk)
The paper is Range of practices and issues in economic capital frameworks, and below is the whole paragraph:
Use of economic capital models in assessing capital adequacy . A bank using an economic capital model in its dialogue with supervisors, should be able to demonstrate how the economic capital model has been integrated into the business decision making process in order to assess its potential impact on the incentives affecting the bank’s strategic decisions about the mix and direction of inherent risks. The bank’s board of directors should also be able to demonstrate conceptual awareness and understanding of the gap between gross (stand alone) and net enterprise wide (diversified) risk when they define and communicate measures of the bank’s risk appetite on a net basis.