Risk Management in Financial Institutions

Risk is the chance of something happening that will have an impact upon objectives. It is measured in terms of likelihood and consequences. In other words, risk is an event/incident/accident that might happen and prevent someone from successfully completing what it is you are setting to do[1]. In today’s globalised economy and ever changing business environment risk is inherent in all aspects of commercial operations. Most organizations in order to safeguard their regular operations from downside consequences of risk implement risk management methodologies. Risk management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities[2].

According to HBR article on “Owning the right risks”[3], typically any organization in order to combat risk must utilize a five step dynamic cycle to promote risk mind-set and culture. First step in this dynamic process is to Identify and understand the major risks facing a business. It is vital to take inputs from all functional departments and focus should really be on major risks. This is often determined by assessing the likelihood of those risks occurring. Once the risks have been identified decision should be made on which risks are natural. There are certain types of risks that a company might be inherently advantaged to own to generate superior returns. However their might be certain risks that the company is better off to mitigate by putting policies in place or transferring them to another party who has the risk appetite. Then the next step in this process is to determine the company’s capacity and appetite for risk. This channelizes company’s scarce resources accordingly. The next most important step is to embed risk in all decisions and processes, which dictates the fact that key business decisions such as...