Risk Management in Banking

Risk

Risk is the potential outcome of gaining or losing something. Risk can also be defined as the intentional interaction with uncertainty. uncertainty is an unpredictable, potential, and uncontrollable outcome. So, the risk is a consequence of action taken in spite of uncertainty.

Risk Management

Risk management is the process of identifying and analyzing risks and managing their consequences. The banking sector has perhaps the most specific focus on the management of financial risk.

Risk Management

Risk management is a discipline at the core of every financial institution and encompasses all the activities that affect its risk profile. It involves identifying, measuring, monitoring, and controlling risk to ensure that 

• The individuals who take our management risk clearly understand it.
• Risk exposure is within the limits set by the BOD.
• Risk-taking decisions are explicit and clear.
• Risk-taking decisions are in line with the business strategy and objective set by BOD.
• Sufficient capital as a buffer is available to take risks.
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Core Risks

The central bank provides different core risk management guidelines through different circulars in order to regulate the core risk activities in commercial banks. There are six core risks.

1. Credit risk management
2. Assets liabilities risk management
3. Foreign exchange risk management
4. Money laundering risk management
5. Internal control and compliance risk management
6. Information and communication technology risk management 

Risk Management in Banking 

The risk management approach is one where banks assess the risks associated with their business activities and take necessary steps to minimize them. Banks have various approaches to managing these risks. These may include internal controls (internal policies and procedures), external controls (external policies and procedures), and technology-based controls. Internal controls help in managing the risks arising out of transactions and internal processes. External controls help to mitigate the risks arising out of customer relationships. Technology-based controls help in mitigating the risks arising out of cyber threats.

1. Regulatory Framework

Regulatory framework refers to the rules and regulations set by government agencies to ensure compliance with laws and protect consumers' interests. In India, RBI Act 1934 provides the regulatory framework for the banking sector.

2. Basel Accords

Basel accords refer to international agreements adopted by the Bank for International Settlements (BIS). These accords provide guidelines for setting minimum capital requirements for banks.

3. Credit Rating Agencies

Credit rating agencies are companies that evaluate the creditworthiness of borrowers based on factors such as financial statements, collateral, etc. Banks use credit ratings provided by these agencies to determine whether they should lend money to certain customers.

4. Fraud Detection Techniques

Fraud detection techniques are methods of detecting fraud by analyzing information related to account opening, transaction processing, and payment processing. Some of the commonly used fraud detection techniques are automated analysis systems, statistical analysis tools, and data mining tools.

5. Customer Due Diligence

Customer due diligence is the process of verifying the identity of the customer before granting him/her access to bank accounts. The purpose of customer due diligence is to detect suspicious activity and prevent fraud.

6. Know Your Customer (KYC)

Know your customer (KYC) is a process of identifying individuals who open bank accounts, make payments, or conduct any type of business using those accounts. KYC helps banks identify potential fraudulent customers and avoid providing services to them.

Read more:

• What is financial accounting? 
• What is management accounting?
• What is leadership?