Question

“It is obvious that the higher exposures to risk could be critical for a bank’s survival in the event of a new financial crisis, but an elimination of the risk exposure is not the answer.” The suggested “balancing act” is not a strategy. What then, would you consider a practicable strategy as it relates to risk taking?

Answer 1

There should be a calculated approach towards risk taking by various banks because risk elimination will not be an appropriate strategy for this commercial banks because it will not just completely eliminate the risk out of various transaction but it will also eliminate the possibility of making a rate of return and the company should be trying to have a proper balancing of its risk as well as return.

commercial bank need to proactively assess the risk associated with taking various transactions which will be helpful for organisation and its stakeholders as commercial banks are generally exposed to any change in the economic scenario then these banks will be trying to often undertake such exposures which can be easily managed and which does not have insolvency risk associated with it.

Commercial banks should properly analyse the creditworthiness before providing various kinds of debt to various borrowers so it will be trying to maintain a better quality of assets on its books of accounts and it should always follow the adequate rules and regulation in respect to maintenance of the capital adequacy norms so the bank will be less exposed to any kind of economic adversity and the bank will also have the advantage of getting a higher market share.

Commercial banks are generally known for maintenance of higher level of liquidity in the economy and it is also known for maintaining a better level of credit availability so these banks need to provide with the optimum service but they need to also undertake various kinds of transactions which are providing them with the rate of return so they will have to take some risk but these risks has to be calculated and they should not completely eliminate the risk by taking appropriate hedging transactions because it will not lead to return generation for this commercial banks of commercial banks will always be providing with the differential between the deposit rate and the interest rate and they will also try to match duration of both the deposits and the loans and hence it will be helping them in order to hedge themself to certain extent without getting exposed to the hedging transactions and it will also maintain their asset quality and reduce the risk associated with insolvency in times of financial crisis.