Thesis: Risk Management of Selected Banks

Topics: Risk management, Operational risk, Bank Pages: 29 (8543 words) Published: August 28, 2013
CHAPTER 1
THE PROBLEM AND ITS BACKGROUND

Background of the study

Banking plays an important role in the lives of individuals as well as nations. As a matter of fact, you couldn’t just imagine how our economic system in particular could function efficiently and effectively without the services rendered by banks. As the center of the financial sector, the banking industry in most emerging economies is passing through a process of change. With the passing of years, our banking system underwent rapid development which includes how they handle different risks to survive in their industry. As the financial activity has become a major economic activity in most economies, any interference or imbalance in banking system’s infrastructure will have significant impact on the entire economy. So to avoid any disruption on this, different banks used their own risk handling methods otherwise called a risk management as their key solution on this.

Risk is a situation involving exposure to danger. It is the possibility that something unpleasant will happen. It may be also an object (person or thing) that creates or intensifies a risk situation. It may be also a scenario that can be described (qualified, if not quantified) and that may be damaging, in any way, to an organization or institution. It may cause a “loss” directly or indirectly.

Any manage and control of potential risks is called risk management. It has a big part in any organization or an institution to have awareness. In the field of banking, it is an industry called as risky business and there is always a management as front-runners when it comes to risks. Risk management approve and monitor risk limits, limit exceptions, new forms of transactions and function as eyes and ears of senior management with regard to risk taking of business.

Due to these various uncertainties and risks, bank managers need reliable risk measures to direct capital to stay within limits imposed by readily available liquidity, by creditors, customers and regulators. They need mechanisms to monitor positions and credit incentives for cautious risk management by divisions and individuals. Risk handling methods otherwise known as risk management is the process by which managers satisfy these needs by identifying key risks obtaining consistent, understandable, operational risk measures, choosing which risk to reduce and which to increase and by what means and establishing procedures to monitor the resulting risk position. Over the years, different risks were encountered by different banks that may consider for them as the stepping stones for the development, improvement and strongholds of their institutions. Undoubtedly true that all banks in the present-day unpredictable environment are facing a large number of risks which may threaten a bank’s survival and success. In other words, banking is a business of risk. For this reason, best risk handling methods and efficient risk management is a must.

Introduction

Operational Risk, defined by the Basel Committee on Banking Supervision1 is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. It seeks to identify why a loss happened and at the broadest level includes the breakdown by four causes: people, processes, systems and external factors.

In this study, an effective risk handling methods in branch operation significantly influences the reputation of a credit institution. Inefficient and inappropriate management of some banks may also adversely influence the reputation of the other banks which may lead sometimes to bankruptcy. Thus, the risks are resident in banking activity and the main objective of risk management is not disposal, but their management. Credit institutions which manage the risks and accept them as conscious, can anticipate the future developments of events.

Various risk management practices in financial organizations became the need of...
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