Basics of Risk Management in a Bank

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Main›Useful information›Basics of Risk Management in a Bank

The banking risks imply financial transactions and services for which it is impossible to guarantee the declared result. Banking risks are divided into:

Custody risks, i.e. risks on deposits. They appear as the client’s withdrawal of cash deposit before maturity. And though the bank does not pay interest on the deposits withdrawn or apply a reduced rate, it can still suffer serious losses;
Credit risks - risks manifested in the form of bad debt when the client does not return or cannot repay the loan;
Mortgage risks - depreciation of the property owned by the bank;
Risks of different nature: HR, industry, foreign exchange, equity, security risks etc.

Banking risk management or risk management appears at all levels of the banking system. This is due to the selection and adoption of risk management strategy where the board of directors is directly involved in.

High-quality risk management is one of the strongest indicators of high business reputation of the bank. Its level is reflected in the bank credit rating, which in turn affects the value and volume of funding.

Effective risk management is the key to a stable relationship with the regulators and minimizing the probability of resonance risk events (problems of the bank with liquidity, large losses as a result of operational risks, default on major transactions or portfolios etc).

As with any area of the bank activity, risk management is not a static process. Introduction of the latest techniques and innovations in risk management should be outstripping and create necessary conditions for the emergence of new and improvement of existing banking products.

Thus, the system of risk management in a bank should be comprehensive, it should be integrated into the bank operations as a whole and ensure effective management of risk and capital in order to maintain the financial strength and stability of the bank.

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