Banking and Risk Management

Financial crises in both the banking sector have prompted many organizations today to
establish some form of risk management in banks.  Although the problem could have
been solved in a more orderly way, with insufficient risk management, some of these
misfortunes took years to fix.

Banks and other financial establishments are what we call risk businesses because of the
heavy losses they can incur business decisions turned sour.  Bank managers need to have
dependable risk management systems to monitor key risks.  These would include
operational risks, risk priorities and risk planning and control.

Although the techniques and procedures will vary depending on where you apply it, the
principles of risk management are basically the same wherever you apply it.  In bank risk
management, you still need to identify what can go wrong and create a plan of action to
avoid what has been identified (or minimize the effects if ever it does).  Banks are now
expected to have risk management as part of their governance structure.

When in comes to key risks, the following have been identified as major sources of losses
and therefore need some sort of risk management:

1.Market situation:  interest rates, changes in the pricing of goods, products or services,
changes in assets due to economic reasons.
2.Credit standing:  changes in the ability of the parties to fulfill their credit obligations.
3.Operational:  risks due to manpower errors in performing their duties.  This could also
include breakdowns in the system which causes the banks to temporarily impeding the
smooth flow of transactions.
4.Aptitude:  includes the risks due to improper monitoring of employees’ performance
thereby contributing to the problems in operations.

These key risks need to be addressed individually and separate bank risk management
plans have to be prepared for each.  Although this may not be a fool-proof plan, the
organization has at least made preparations for each mentioned key risks and the process
of avoidance and/or recovery can easily be implemented.