Risk is the potential outcome of gaining or losing something. Risk can also be defined as the intentional interaction with uncertainty. uncertainty is an unpredictable, potential, and uncontrollable outcome. So, the risk is a consequence of action taken in spite of uncertainty.
Risk management is the process of identifying and analyzing risks and managing their consequences. The banking sector has perhaps the most specific focus on the management of financial risk.
Risk management is a discipline at the core of every financial institution and encompasses all the activities that affect its risk profile. It involves identifying, measuring, monitoring, and controlling risk to ensure that
- The individuals who take our management risk clearly understand it.
- Risk exposure is within the limits set by the BOD.
- Risk-taking decisions are explicit and clear.
- Risk-taking decisions are in line with the business strategy and objective set by BOD.
- Sufficient capital as a buffer is available to take risks.
The central bank provides different core risk management guidelines through different circulars in order to regulate the core risk activities in commercial banks. There are six core risks.
- Credit risk management
- Assets liabilities risk management
- Foreign exchange risk management
- Money laundering risk management
- Internal control and compliance risk management
- Information and communication technology risk management
Risk Management in Banking
The risk management approach is one where banks assess the risks associated with their business activities and take necessary steps to minimize them. Banks have various approaches to managing these risks. These may include internal controls (internal policies and procedures), external controls (external policies and procedures), and technology-based controls. Internal controls help in managing the risks arising out of transactions and internal processes. External controls help to mitigate the risks arising out of customer relationships. Technology-based controls help in mitigating the risks arising out of cyber threats.