Question

M​‌‌‌‌‌‍‍‌‌‌‌‍‍‍‌‌‍‍‌​odern banks have to face several types of risks and failures of risk management have been claimed to be among the key causes of the 2008 financial crisis. It is not only regulators that have placed increased emphasis on risk management in an attempt to foster financial stability, it is also all the more important for bankers to manage their capital more efficiently in order to maximize risk-adjusted returns from their business activities.

In view of the above, critically discuss the major post-2008 crisis risk management ini​‌‌‌‌‌‍‍‌‌‌‌‍‍‍‌‌‍‍‌​tiatives undertaken by modern banks to be able to respond to risks better.

Answer 1

Risk Management:-

Risk: - Risk related to banks is financial risk. Financial risk means loss of investment or loss of expected return on investment.

Management of Risk: - Risk Management means taken appropriate action on the risk assessed by the fund provider like Mortgage of assets, high interest rates etc.

Techniques to Measure Risk

1. Beta: - Measurement of systematic risk. Systematic risk is related with uncontrollable market condition.
2. Standard Deviation: - Deviation from expected return.
3. Value at Risk: -Statistical method of measurement of investment value can be lost.

Risk faced by banks recently

1. Operation Related Risk: - Banks nowadays requires performing various operations which carries various risk.
2. Credit risk of borrower :- Default by borrower against payment of debt and interest
3. Market Related Risk:- Amount invested by bank is market face equity related risk, Interest rate risk, foreign exchange risk etc.
4. Liquidity related Risk :- Demand and supply of fund is required to measure by bank.
5. Other Risk- like Business Related Risk etc.

Risk management action taken by Banks :- Following action taken by banks to manage risk.

1. Hedging techniques: - By hedging banks can reduce their future losses.
2. Diversification of assets: - By diversification of assets risk can be reduced.
3. Collateral securities: - Collateral securities can be a better tool to control risk.
4. Personal Guarantees: -Guarantees provided by personals can also reduce risk.
5. Fulfilling KYC Norms: - KYC norms meeting can also reduce risk at considerable level.
6. Better decision making: -Decision of banks should be sound.
7. Making good strategies: - Good strategies can also be helpful to mitigate risk.
8. Supervision over debt provided :- Debt supervision is must
9. Better Data management:- Banks focused on better data management so that they control debt in better ways.
10. Other –like hiring of experts, use of advance techniques and better internal control.