CHAPTER 4
Fundamentals of Risk Management
4.1 RISK MANAGEMENT CONCEPT
Risk management essentially involves identification of risks that surface during the course of the bank's business and dealing with them in an effective manner to minimize or eliminate the losses that may occur. It is a process that involves development of tools and techniques to identify and assess risks and establish systems and procedures to manage them. It includes formulation of policies and strategies and establishment of monetary limits and benchmark standards for different types of activities. Risk management is a series of business decisions based on appropriate business policies and strategies that seek to optimize risk-adjusted returns on assets. The aim is not to avoid risks, but to handle them and minimize their impact through the exercise of appropriate options like accepting and managing risks, hedging, or transferring them.
Though development of tools and techniques and application of limits and controls are the core activities of the process, management attitude and employee ethics are important for realizing the full benefits of risk management. The bank management must establish high standards for managing risks and determine the limits and boundaries of acceptable risk levels, and the employees should acquire knowledge about the risks and participate in handling and controlling the risks. Consequently, management must devote enough resources to develop the internal risk management capability. ...
