Question

What are the financial risk management strategies applicable to banking sector?

Answer 1

The financial risks in the banking sector are generally associated to loans, bonds, commodities, stocks and interest rates. Such risks are encountered by the multinational corporations, joint stock firms and financial institutions. When an organization is not able to meet its obligations, it implies that it has not managed its risks effectively.

Strategies for managing financial risk at banking:

1. The management should be transparent and the issues related to risk must be translated in one specific language so that both the management and employees understand the issue and work together for fixing the issue. The various departments should have common link where the line of work is same while fixing the issues.
2. Outlining the risk exposure and prioritizing it, giving the scale of preference. The banks require to be more alert in operational, credit and market risks. The company should use tools like Cash flow at risk, Value at risk, Monte carlo simulations for testing the level of risks.
3. Hiring the experts for developing the risk management policies, who have specialized training and experience while handling the risk issues. Also the banking practices have to be clear and transparent, so the risk management decisions are centralized.
4. Creating the tool for managing the risk. The value of IT to the banking industry is becoming apparent as it helps in assessing the risk, analyzing it and then finally its compliance.