2. Risk
A risk can be defined as an unplanned event with
financial consequences resulting in loss or
reduced earnings
Risk is the possibility of something adverse
happening
In commercial and business risk generates profit
or loss depending upon the way in which it is
managed
3. Risk Management
Risk management is the process of assessing
risk, taking steps to reduce risk to an acceptable
level and maintaining that level of risk
Thus, we can say that after the risks have
been identified, risk management attempts to
lessen their effects.
4. Risk Management
This is done by applying a range of management
techniques.
For example, the risk may be reduced by taking
out insurance or using derivatives or re-plan the
whole project
5. Risk Management Strategies
The essential components of any risk
management system are;
Risk Identification- i.e the naming and defining
of each type of risk associated with a transaction
or type of product or service.
Risk Measurement- i.e. the estimation of the
size probability and timing of potential loss under
various scenarios
6. Risk Management
Risk Control- i.e. the framing of policies and
guidelines that define the risk limits not only at
the individual level but also for particular
transactions.
In risk management exercise the top
management has to lay down clear cut policy
guidelines in quantifiable and precise terms
7. Risk Management
Banks face several types of risks and always are
same throughout institutions.
The main risk include;
Credit Risk
Interest rate risks
Liquidity risks
Foreign exchange risks
Regulatory risks
Technological risks and
Strategic risks
8. Credit Risk
This is the risk of non recovery of loan or the
risk of reduction in the value of asset.
The credit risk also includes the pre-payment
risk resulting in loss of opportunity to the bank
to earn higher interest income.
Credit Risk also arises due excess exposure to a
single borrower, industry or a geographical area
9. Interest Rate Risk
This risk arises due to fluctuations in the
interest rates.
It can result in reduction in the revenues of the
bank due to fluctuations in the interest rates
which are dynamic and which change differently
for assets and liabilities.
10. Liquidity Risk
Liquidity is the ability to meet commitments as
and when they are due and ability to
undertake new transactions when they are
profitable.
For example, banks tend to fund long-term loans
(like mortgages) with short-term liabilities (like
deposits).
11. Foreign Exchange Risk
The risk that a banks' financial performance or
financial position will be affected by changes in
the exchange rates between currencies
Risk may arise on account of maintenance of
positions in forex operations and it involves
currency rate risk,
12. Regulatory Risk
Regulatory risk refers to the risk that a change
to the laws or regulations will hurt a business or
investment by affecting that business, or
market.
13. Technology Risk
This risk is associated with computers and the
communication technology which is being
increasingly introduced in the banks.
This entails the risk of obsolescence and the
risk of losing business to better
technologically.
14. Strategic Risk
Risk-This is the risk arising out of certain
strategic decisions taken by the banks for
sustaining themselves in the present day
scenario
for example decision to open a subsidiary may run
the risk of losses if the subsidiary does not do
good business
