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What is risk management in the banking industry?

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Question added by Fida Abo Alrob , Sr. Copywriter , Imena Digital
Date Posted: 2014/04/06
Mujtaba Hussain
by Mujtaba Hussain , Accounts officer , Miraj Entertaiments

Risk management is an essential part of helping the bank grow while keeping an eye on the potential consequences if something goes wrong.

The perception of risk management is fundamentally changing within today’s institutions. It is no longer purely used as a control mechanism but as a critical input into the basic business question that if the revenues out of this transaction will compensate me for the additional risks i am taking on? Risk management is an essential part of helping the bank grow while keeping an eye on the potential consequences if something goes wrong. This could be external factors such as a recession or a stock market crash or internal factors such as IT failure. In simpler terms Risk Management takes two things into consideration:

The likelihood of something bad happening or

The likely cost of something happening

Once the associated risk has been identified, say with a business deal or a transaction, it will decide whether or not if the risk is too high to approve. If the risk factor stands high for the particular business venture or investment opportunity the bank is basically not allowed to proceed with that piece of business.

“Risk management is a very big area of banking; it has a controlling role in the business. For example we make sure that the bank does not take too much money from the client, or push them into liabilities. Basically we want to know if they can repay the debt “, says Diana, a Risk Management Specialist in Frankfurt.

Risk Management Roles

Credit Risk Management

This is a bank’s internal credit approval and monitoring function, it looks at how risky transactions are going to be and if they are worth the risk. For example, it will set the levels of ‘risk adjustment’ on credit arrangements, which means it sets higher rates of interest to a company with a poor credit rating to avail a loan.

Market Risk Management

Investment banks buy and sell securities on the stock markets (bond and shares); prices of securities fluctuate heavily in the stock market, if the price goes down, a loss will be made and vice versa. There are many types of security available and trading across different countries is complex. Hence, there are various risks in trading such as

Equity risk – that stock prices will change

Interest rate risk- that interest rates will change

Currency risk –that foreign exchange rates will change

Commodity risk- that the price of a commodity will change

Investment Risk Management

If the bank acquires another company due to amalgamation or absorption there will be a whole new set of risks associates with the new company with regard to profit sharing, tax arrangements, employee share benefit programs etc. The new company will also need to have its risk processes aligned with the parent company.

Operational Risk Management

This department covers the risks associates with the day to day functioning of the banks. There are different types of operational risk, which assumes significance due to recent burst of banking frauds, technological failures including ATM heists, hacking etc. Some of them are:

Internal Fraud- Tax evasions, bribery

Employment practices and workplace safety- Health and safety

Clients products and business practice- Defective products and improper trade practices

Business disruption and systems failures -Including software or hardware failures.

Different sectors operate differently with its own pressures and working practices, to be successful in these areas, banks have to adhere to the risk management principles to avoid financial disruptions and violations which will in turn lead to a counter effect on the investors, creditors and other stake holders of the banks.

Risk management assumes importance considering the economic crisis in Europe, U.S. U.K. which have hit the governments, banks, creditors and  more importantly the citizens of the country whose lives are struck hard by unemployment, inflation leading to public outrage and showing the poor control and regulatory measures of the central banks of respective states. Greece, Portugal, Italy are some classic examples of poor risk management compliance and control.

The core business of a bank is to manage risk and provide a return to the shareholders in line with the accepted risk profile. The credit crisis and ensuing global recession seem to indicate that the banking sector has failed to tend to its core business. If the banks had exercised effective credit controls, then credit default swaps would not have been bought up with so much eagerness. If the banks had attended to risk management, then there would not be flood in the U.S. market of cheap short term interest rate mortgages that led to the so called housing bubble and the wave of bankruptcies and foreclosures.

Risk management can be most effective when it is applied consistently across the banking sector with policies and procedures developed by “Risk Experts” which include experts in economics and banking compliances, CPA’s, Industry honchos who have the training and experience for their country, area and client mix.

Use of Information Technology in Risk Management

The value of IT appears to be increasing over time to banking organisations as the environment grows more complex. IT systems and practices if properly developed and used can assist the company in risk management by providing control and compliance, monitoring technology, databases, market research, analysis and communication tools. A risk management culture can be embedded in the organization through training, communication and incentives. 

Mohamed Hamdy Kamal Riad
by Mohamed Hamdy Kamal Riad , Senior Solution Architect , IBM

Risk management is an essential part of helping the bank grow while keeping an eye on the potential consequences if something goes wrong.

 

It includes risk identification, measurement and assessment, and its objective is to minimize negative effects risks can have on the financial result and capital of a bank.

 

Some examples of risks are :

 

Liquidity risk

Credit risk

Market risk

Interest rate risk

Exposure risks

Foreign exchange risk 

Investment risks

 

Mohammad  HARB
by Mohammad HARB , treasurer , primegate for IT and telecommunications

Risk managment include credit risk .. Operation risk.. Economic .. Risk and market risk so each part it very important for the bank and each part it need deep analysis and keep your eyes on any deviation from the bank target and core number

You are absolutely right. I have also gone through the different replies to your thread. But it should be the point to follow that a bank can not earn without exposing itself at risk. You may say “Maximum Risk Maximum Profit”.  There are two types of business, a bank always run. First Domestic and Second Overseas (Overseas business is engaged with its own foreign representation in the form of its branches and subsidiaries as well as its correspondent banks/institutions and non-correspondents banks/FIs and DFIs).

 

Domestic banking always encounters with political and bureaucratic (internal/external) pressure/threats which generally links with corporate customers at higher level and the financial assistance schemes with certain discriminations which the bank can not set aside. Whilst the Overseas business mostly encounters with geo-political situation and diplomatic environment. In both the situations a bank can easily keep itself away from exposing to a risk by analyzing net weight of tangible collaterals, values of commitments and the effective tenure of a transaction within the purview of business relationship in conjunction with local and international rules and practices. In such process it should be pertinent to care that the commitments between the bank and its counterpart should not contain arrows of opponent dimensions also keeping in view that a bank can not afford any charge of a lake in its commitments. Theory and Practice must be in consonance with each other because any lapse in analyzing the facts on ground and underground may entail in any dire situation for bank and its counterpart and entire benefit may go to the third party behind the transaction.

 

Muhammad Hussain

 

 

محمود سماره
by محمود سماره , Head of Facilities (Masyoun Branch) , Bank of Palestine

Risk management is an essential part of helping the bank grow while keeping an eye on the potential consequences if something goes wrong.

 

The perception of risk management is fundamentally changing within today’s institutions. It is no longer purely used as a control mechanism but as a critical input into the basic business question that if the revenues out of this transaction will compensate me for the additional risks i am taking on? Risk management is an essential part of helping the bank grow while keeping an eye on the potential consequences if something goes wrong. This could be external factors such as a recession or a stock market crash or internal factors such as IT failure. In simpler terms Risk Management takes two things into consideration:

  • The likelihood of something bad happening or
  • The likely cost of something happening
  • Not achieving goal and objective

Once the associated risk has been identified, say with a business deal or a transaction, it will decide whether or not if the risk is too high to approve. If the risk factor stands high for the particular business venture or investment opportunity the bank is basically not allowed to proceed with that piece of business.

 

 

 

Risk Management Roles

Credit Risk Management

This is a bank’s internal credit approval and monitoring function, it looks at how risky transactions are going to be and if they are worth the risk. For example, it will set the levels of ‘risk adjustment’ on credit arrangements, which means it sets higher rates of interest to a company with a poor credit rating to avail a loan.

Market Risk Management

Investment banks buy and sell securities on the stock markets (bond and shares); prices of securities fluctuate heavily in the stock market, if the price goes down, a loss will be made and vice versa. There are many types of security available and trading across different countries is complex. Hence, there are various risks in trading such as

  • Equity risk – that stock prices will change
  • Interest rate risk- that interest rates will change
  • Currency risk –that foreign exchange rates will change
  • Commodity risk- that the price of a commodity will change

Investment Risk Management

If the bank acquires another company due to amalgamation or absorption there will be a whole new set of risks associates with the new company with regard to profit sharing, tax arrangements, employee share benefit programs etc. The new company will also need to have its risk processes aligned with the parent company.

Operational Risk Management

This department covers the risks associates with the day to day functioning of the banks. There are different types of operational risk, which assumes significance due to recent burst of banking frauds, technological failures including ATM heists, hacking etc. Some of them are:

Internal Fraud- Tax evasions, bribery

Employment practices and workplace safety- Health and safety

Clients products and business practice- Defective products and improper trade practices

Business disruption and systems failures -Including software or hardware failures.

Different sectors operate differently with its own pressures and working practices, to be successful in these areas, banks have to adhere to the risk management principles to avoid financial disruptions and violations which will in turn lead to a counter effect on the investors, creditors and other stake holders of the banks.

Risk management assumes importance considering the economic crisis in Europe, U.S. U.K. which have hit the governments, banks, creditors and  more importantly the citizens of the country whose lives are struck hard by unemployment, inflation leading to public outrage and showing the poor control and regulatory measures of the central banks of respective states. Greece, Portugal, Italy are some classic examples of poor risk management compliance and control.

The core business of a bank is to manage risk and provide a return to the shareholders in line with the accepted risk profile. The credit crisis and ensuing global recession seem to indicate that the banking sector has failed to tend to its core business. If the banks had exercised effective credit controls, then credit default swaps would not have been bought up with so much eagerness. If the banks had attended to risk management, then there would not be flood in the U.S. market of cheap short term interest rate mortgages that led to the so called housing bubble and the wave of bankruptcies and foreclosures.

Risk management can be most effective when it is applied consistently across the banking sector with policies and procedures developed by “Risk Experts” which include experts in economics and banking compliances, CPA’s, Industry honchos who have the training and experience for their country, area and client mix.

Use of Information Technology in Risk Management

The value of IT appears to be increasing over time to banking organisations as the environment grows more complex. IT systems and practices if properly developed and used can assist the company in risk management by providing control and compliance, monitoring technology, databases, market research, analysis and communication tools. A risk management culture can be embedded in the organization through training, communication and incentives. 

 

Abdul Samad Nadeem Malik
by Abdul Samad Nadeem Malik , Business Support Officer , Thimar Al Jazirah - 3M ESPE

Risk management in bank operations includes risk identification, measurement and assessment, and its objective is to minimize negative effects risks can have on the financial result and capital of a bank.

Mian Muhammad Naeem Jan
by Mian Muhammad Naeem Jan , Chief Finance Officer , Management Company

its about the identification, measurement and assessment of Risk and to keep an eye to keep away any risk in any transaction 

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