Bank Risk Management: Overview, Steps, Risk Types in Banking
There is a risk in running a business of any kind, not to mention commercial banks. Banking businesses rather bear relatively more risk than other types of businesses. In providing financial services, they assume various kinds of financial risks. Over the last decade, our understanding of the place of commercial banks within the financial sector…
Liquidity Risk Management: How Banks Manage Liquidity Crisis
Two different notions of liquidity risk have evolved in the banking sector. Each has some validity. The first, and the easiest in most regards, is liquidity risk as a need for continued funding. The counterpart of standard cash management, this liquidity need is forecastable and easily analyzed. Yet, the result is not worth much. Banks…
Credit Risk Management: How Banks Manage Credit Risks
While they recognize counterparty and legal risks, they view them as less central to their concerns. Where counterparty risk is significant, it is evaluated using standard credit risk procedures and often within the credit department. Likewise, most bankers would view legal risks arising from their credit decisions or, more likely, proper processes not employed in…
Market Risk Management: How Banks Manage Market Risks
The central components of a market risk management system are RAROC (risk-adjusted return on capital) and value at risk (VaR). RAROC is used to manage risk related to different business units within a bank and evaluate performance. Time Horizon for Measuring Risk Exposure Risk measurement is based on time horizon; ideally, risk measurement would be…
Interest Rate Management: How Banks Manage Interest Rates
The interest rate risk is the second major concern and ongoing risk monitoring and management for a bank. However, the tradition has been for the banking industry to diverge somewhat from other parts of the financial sector in treating interest rate risk. Interest Rate Management Procedures However, most commercial banks clearly distinguish between their trading…
Foreign Exchange Risk Management in Banking
In this area, there is a considerable difference in current practice. Most banking institutions view activity in the foreign exchange market beyond their franchise, while others are active participants. The different franchises in the banking industry can explain this. The former will take virtually no principal risk, forward open positions, and expect trading volume. There…
