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Paper Topic:

risk management

Running Head : Risk Management

Risk Management from Perspective of Banks , Interest Rate Risk , Liquidity Risk , Problems Arising from Operational Risk Management , Most Important Area of Risk Management

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Risk Management

Introduction

The importance of Risk management in financial sector has been recognised world wide . It has been defined as process of identification , analysis and either acceptance or mitigation of uncertainty in investment decision-making (Alexander . C , 2001 Effective risk management promotes stability of both financial institutions and the industry by protecting a financial

institution against market , credit , liquidity , operational , and legal risk . The primary means of protection is the financial institution 's risk (or economic ) capital . Risk management involves estimating how much risk each business unit , or division , contributes to the firm and thus to overall capital requirements (Chris D 'Souza and Alexandra Lai , 2006

The major UK banks are diverse in nature that enabled them to withstand the deterioration of the retail banking environment in 2006 . In the year 2007 , the banks are set to remain both profitable and highly capitalised , due to the reason it is expected that the sector will face a number of risks , especially if the business operating environment were to deteriorate . The banks can face much risk in retails markets that include : dealing with increasing arrears on unsecured lending preparing for a possible sharp weakening in the housing market and adjusting their business model in response to resistance from consumers as well as scrutiny from the public authorities into their charging and marketing practices . In the wholesale markets , the banks are facing the chances of risk because the markets are now turning to low-volatility and spread-compressed markets and hence these developments have contributed towards the rise of risk factor in the financial markets (Financial Risk Outlook , 2007

There are several factors pointed out by experts that are responsible for ample growth of operational risk in banking sector . The operational risk is accelerated by the recent technological developments that facilitate the use of e commerce (BIS 2001 ) Across the world financial institutions are now getting involved in mergers with the financial institutes of other countries , this trend has also contributed towards the rise of management risk . Banks of today are now providing very large volume services to the customers and they are using several financial techniques for this purpose however this development in the banking operations is alarming the danger of risk at high level (Basil Committee on banking supervision , 2001

This situation enforce the supervisors and managers of financial sector to emphasis more on managing the operational risk , as a result the banking sector is going through many innovations and enhancement specially in the field of internal capital assessment and allocation process . Banks are now looking for modernized and inventive ways in to enhance the returns in banking activities . The banks are also required to ascertain that if any issue related to the risk management come in front of them , they will be able to cope up with the...

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