Risk Management in Financial Institutions
Yasir is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The banking and finance industry has seen the need of controlling various types of risks. The Royal Bank of Scotland (NYSE: RBS) is one of the biggest banks in the world and has switched to better risk management strategies. The talented risk management team at RBS matches the risks with the return requirements of Stakeholders and the appetite for risk depends on the strategies used within the Bank.
Risk Management is never easy and there are institutions which lose millions of dollars every year due to poor irsk management measures. With the use of relevant risk management measures, a financial institution is likely to avoid most of its problems and can maximize its revenues and returns while minimizing the risk losing out. Responsibility and Accountability are 2 main principles of the risk management framework at The Royal Bank of Scotland. RBS recently changed their risk management framework in several different areas. They have strenghened several key areas including risk management responsibilities for future needs, better understanding of risks and and managing these risks using different scales, enhancing the overall risk management framework and managing the firm's exposure in order to stay safe.
Financial institutions have come across a lot of difficulties since the beginning; however, the most serious problem of these is related to credit. There can be several problems which might be a result of poor credit management against borrowers. Credit risk management needs to be effective in order for the bank to stay well off and stable financially in the long term. Goldman Sachs (NYSE: GS) has an effective risk management team. The credit risk management team at Goldman Sachs is qualified and tries to protect the firm's capital from counterparty default. The most common source of credit risk is due to the lending of loans, however, there are other factors leading to this specific risk including the books of the financial institution and the state of financial position.
Risk management is crucial for the stability and the financial success of a financial institution. Goldman sachs defines risk as "a probability or magnitude of a deviation from an assets expected return." The firm uses, both, qualitative and quantitative measures in order to asses its risk. The team at Goldman Sachs uses a framework in order to asses and manage risk. Also, it claims to use a risk management culture which is basically the attitude of the company towards assesing and managing all its risks. Without risk management, a financial institution can go bankrupt as it is not proactive and any sudden changes or movement in the pattern of certain activities can destroy the institution
There should be an entire department within the institution which should specialize solely in risk management. More than fifty percent of the problems faced by major financial institutions all over the world are because of the lack of an appropriate risk management system. JPMorgan Chase & Co. (NYSE: JPM) has a decent risk management framework . Even though the Bank uses appropriate risk management measures, regulators believe that JPMorgan has a lot of weaknesses in the risk management department. In fact, the risk management framework was so weak that CEO Jamie Dimon found out about a masive $5 million loss in the Wall Street Journal and not through the risk management team at JPMorgan.
Financial institutions cannot run away from risk and there is risk involved in every part of the institution’s transaction and the entire foundation of these financial institutions is built on risk.
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