Management of Banking Risk
Risk Management
is already a familiar component of banking. What board of directors meeting does not include banking risks
on its agenda? Often the review of banking risks is referred to in other terms, such as level of past-due loans unaccrual, interest rate spread, level of liquidity, and market competition
and position. Banking is a fundamental equation of pricing products and services to balance the cost of doing business , addressing the risk of the transaction, and providing a return to the shareholders based on their capital investment
. In other words, taking risk is part of banking.
is already a familiar component of banking. What board of directors meeting does not include banking risks on its agenda? Often the review of banking risks is referred to in other terms, such as level of past-due loans unaccrual, interest rate spread, level of liquidity, and market competition and position. Banking is a fundamental equation of pricing products and services to balance the cost of doing business , addressing the risk of the transaction, and providing a return to the shareholders based on their capital investment. In other words, taking risk is part of banking.Bank need to develop and implement formal risk management policies and procedures. This requirement is a result not only of the current banking environment
, but also is the regulatory environment
. In addition, banks need to be prepared for risk management examinations from their regulatory agencies
. The development and implementation of risk management policies and procedures helps management prepare for this examinations.
, but also is the regulatory environment. In addition, banks need to be prepared for risk management examinations from their regulatory agencies. The development and implementation of risk management policies and procedures helps management prepare for this examinations.There are nine types of risk that exist in banking:
- Credit risk
. The risk from debtor’s failure to meet the terms of any contract with the bank or failure to perform as agreed otherwise.
- Interest rate risk
. Risk from movement in interest rates.
- Liquidity risk
. Risk from a bank’s inability to meet its obligations when they come due, without incurring unacceptable losses.
- Price risk
. Risk from changes in the value of portfolios of financial instruments.
- Transaction risk
. Risk from problems with service or product delivery.
- Compliance risk
. Risk from violations or non-conformance with laws, rules, regulations, prescribed practices, or ethical standards.
- Strategic risk
. Risk from adverse business decisions or improper implementation of those decisions.
- Foreign exchange risk
. Risk from movement of foreign exchange rates, found in cross-border investing and operating activities.
- Reputation risk
. Risk to earning or capital arising from negative public opinion.
These categories of risk should be used by management in developing the financial institution’s risk management policies and procedures. A Financial Institution
has good risk management techniques
though efficiency that management complies with the following:
has good risk management techniques though efficiency that management complies with the following:- Identifying
. Proper risk information identification systems should focus on recognizing and understanding existing risks or risks that may arise from new business initiatives. Risk identification
should be a continuous process and should occur at both the traction and portfolio level.
- Measuring
. Accurate and timely measurement of risk
is also a critical component of an effective risk management system
. A bank that does not have risk measurement systems in place has a limited ability to control or monitor risk levels. The level of complexity or sophistication of the risk measurement techniques used in bank should reflect the sophistication of the risk assumed. Banks should periodically verify the integrity of risk measurement tools.
- Controlling
. Controlling risk requires that the bank establish and communicate risk limits through policies, standards, and procedures that set out specific responsibilities and authorities. Control limits have to translate into meaningful management tools to evaluate what is occurring, and what should be adjusted if risk conditions or risk tolerances change. The bank should have not only a process to monitor the controls but also procedures to approve exceptions or changes to risk limits when warranted.
- Monitoring
. Critical to risk management processes is the ongoing monitoring of risk levels to ensure expeditious management of risk positions, limits, or policy exceptions. The frequency, level of detail, accuracy, and timeliness of monitoring reports should be commensurate with the risk areas that are monitored. Individuals responsible for managing risk areas should receive risk-monitoring reports.
Those risks must be carefully examined and managed by bank managers on a daily or periodical basis. There many tools and process available for bank managers to minimize, reduce and monitor those risks so that they are kept under a controllable level which is compatible with the overall risk level acceptable by the banks’ board of directors and owners.
The complexity of the risk facing managers of modern financial institutions and they are aware that to ensure survival, a bank manager needs to protect the institution against those risks, which can cause the bank to fail.
By: LIM CHHAYADA
Lecturer of Risk Management for Bank
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Reference :
- Norton University Newsletter, September 2010 / January 2011, Page: 38.
