Risk management in commercial banking What is Risk?

It is a potential that event expected or not expected may have an adverse effect on a financial institutions capital or earning. Risk is inherent in all business and financial activities. The greater the risk associated with an activity the greater potential to generate a high return. Banks do take risk the biggest risk is not taking a risk. Definition of Risk management Risk management is a process of Identifying, Measuring, monitoring and controling the risk. These four points are essential to risk management. Identifying Risk Risk should be identified through Institution wide Business line Products Transactions

Challenge in Banking Banking is an art of striking a balance between Risk and Revenue. Risk management Organization Risk management is a decentralized process guided by centrally established policies and rules . Senior staff committee defines credit culture and established overall policies and rules. Line management design lending procedure and control risk. There are usually five major organization group that participate in risk management process. These groups are responsible for defining, Implementing, or reviewing risk management policies, rules within the bank. Banking Risk Taking risk can almost be said to be the business of bank management. A bank that is run on a principles of avoiding all the risks or as many of them as possible. Will be a stagnant institution, and will not adequately serve the legitimate credit needs of its society. On the other hand bank that take expensive risk or credit is more likely takes them without recognizing their extent on their existence will surely run into difficulty.

All banks involve some types of risk and banking is no exception. Credit risk is major category of risk of the bank. It occurs whenever there is a possibility that is the customer cannot meet contractual obligation to the bank in term of The delivery of documents or commodities where the bank bears the whole risk or The payment of principle, interest, fees, or commissions.

The overall objective of Risk management is To increase enterprise value Provide appropriate level and allocation of capital Increase return on capital Improving consistency of earning

Risk Must be known Understood Quantifiable Controllable/acceptable/bankable

Different Risk faced by Commercial banks Credit Risk Market Risk Interest Risk Liquidity Risk Operational Risk Ownership/management Risk Country Risk

Challenges facing Inflationary risk Credit risk Refinancing Equity Financial system instability

Political Legal Risk mitigation strategy Record management Credit management Insurance Partnership and merger Due Diligence Microeconomic Forecasting

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http://www.academia.edu/1470560/Banking_Industry_Associated_Risks_and_Mitigation_Strate gies Risk management in Islamic banking

Although the principles of Islamic finance inherently limit the exposure to certain risks, risk awareness and risk management frameworks in Islamic banks could be further improved. Islamic financial institutions have a relatively short track record (modern Islamic banking has been in existence for only three decades, and many Sukuk products less than a decade). Most Islamic banks are active in the developing world where transparency, corporate governance and risk management at large are still works in progress. Improving risk management is all the more important as Islamic products are becoming more complex and sophisticated with financial innovation. Special risks associated with Islamic finance include displaced commercial risk, Shariacompliance risk, entanglement of market and credit risks in Islamic banks asset classes, heightened liquidity risk due to large maturity mismatches and scarce liquidity management tools, reputational risk, etc. A limited range of possible funding sources leads to concentrated liabilities, imbalanced funding mixes and stretched capital management strategies. Financial risk Equity investment risk Credit risk Liquidity risk Rate of return risk Business risk 30 http://books.google.co.uk/books?id=w4ihwcIukkC&pg=PA29&lpg=PA29&dq=types+of+islamic+banking+risk&source=bl&ots=PRKmBf wccH&sig=OjRft4KrhYKLVWWtD9ICsXlTU9M&hl=en&sa=X&ei=UFhsUaKeFoWMOK_2g fAC&ved=0CDoQ6AEwAg#v=onepage&q=types%20of%20islamic%20banking%20risk&f=fal se

144 http://books.google.co.uk/books?id=jvTtDzD5uFQC&pg=PA144&lpg=PA144&dq=managemen t+of+risk+in+islamic+banking&source=bl&ots=73jP3iQTvt&sig=Yq_jzTveLrfSOHdLOOPJOq GAySE&hl=en&sa=X&ei=cFlsUZPvO4XB0gWVpIHgDQ&ved=0CGEQ6AEwBQ#v=onepage &q=management%20of%20risk%20in%20islamic%20banking&f=false

 Elaborate the roles of ERM for Insurance Companies Enterprise Risk Management (ERM) interests a wide range of professionals including Financial manager, Underwriters, Accountants, Internal Auditors, Risk managers E.T.C. However current ERM solutions often do not cover all the risk because they are motivated by the core professional ethics and principles of those who drive forward ERM systems. In a typical Insurance company many professions needs to work together to achieve the corporate objectives and they face risk both financial and non-financial from multiples sources. These risks affect Insurance companies. Consequently that needs to be managed in a holistic manner. A Framework of ERM should include such an approach to Risk management. Which provide a common understanding across a multidisciplinary group of people. However insurance companies often manage risk in silos, taking little or no holistic view. Every organization is exposed to various risks. While many of them are pure risks like fire, explosion, chemical release etc., some of them are speculative. Pure risks are handled as operational and safety issues by professionals and finance personnel have to address the risks arising out of failure of above operational and safety measures. Together they need to ensure that the organization is able to withstand any risks or failure of systems and can continue its operations without much struggle. The Risk Management and Insurance Planning is required for any organization to review their risk management strategies. Objectives Of Risk management studies To carry out a systematic, critical appraisal of all potential risks involving personnel, plant, services and operations (risk identification, assessment and control) and

To review the insurance coverage and to identify areas of coverage to optimize the risk exposure

Scope of Risk management and Insurance Policies Identification of all major internal and external pure risks including the natural risks and analysis of the impact of above risks

Review of existing risk control measures Identification of possible areas for refund of premium and suggestions regarding procedure for the same Selection of insurance coverage on the basis of risk analysis Providing guidelines for fixation of sum insured and illustrate the same on a selected equipment Evaluation of business interruption exposure due to identified risks Providing guidelines on documentation requirements, procedures for claims under various policies

How Insurance Companies Manage the Risk It is much easier to ensure that risks have been mitigated within a business when a comprehensive set of risk management procedures is in place. A full range of these procedures should address how to locate, mitigate, and insure risks. A summarization of these procedures follows: Conduct a review of all company locations, contracts, and applicable government regulations to determine the extent of risks to which the company is subjected. This task can be made easier by using one of the insurable hazard checklists supplied by insurance companies. Other investigative options are to hire a consultant or to review the company's history of losses sustained. The review should include a detailed report on all buildings and equipment, the cost of a business shutdown resulting from specific hazards, the risk of loss to other parties by the company, and risks caused by specific events, such as flood and fire damage. Designate a risk mitigation strategy for each identified risk. The general approaches to mitigation include the complete avoidance of a risk, reduction of the underlying hazard, self insurance that essentially retains the hazard, or buying insurance to shift the risk to an insurance company. The option selected should be based on a cost-benefit analysis that matches the cost and probability of a risk against the cost of the mitigation technique. Some of the more common mitigation techniques include duplicating key systems to guard against the destruction of one of them, The implementation of selected risk mitigation methods must then be dealt with. This can require a budget for new systems to be installed, such as fire suppression systems in a facility. Other changes are procedural, and so require cooperation from management to institute training and enforcement activities.

It is nearly always necessary to buy insurance for some risks, so the selection of an insurance broker is of some importance. A knowledgeable broker can ensure that the correct coverage is selected, and can recommend the best insurance providers, based on his or her knowledge of their reputation, financial strength, and service after a loss has been incurred. Once a high-grade broker is found, it is better to retain that person's services over the long term, rather than routinely switching brokers at regular intervals. Review the risk situation with the insurance broker, and jointly decide upon the best insurance coverage to buy. Possible choices include:

Boiler and machinery. Coverage is for damage to boilers and machinery, and pays for injuries caused by equipment. Business interruption. Pays for business expenses while the entity is not operational. Commercial property. The basic version covers losses from fires, explosions, wind, and so on. The expanded version covers a broader range of damage situations. Comprehensive auto liability. Covers injuries and property damage related to auto incidents. Comprehensive crime. Coverage is for theft, robbery, and employee dishonesty. Directors and officers liability. Coverage is for directors and officers for their activities while working for the company.