Risk Management Guidelines For Commercial Banks

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1. To what extent is the performance of commercial bank affected by credit risk management?

As time has shown, financial institutions undertake an abundance of uncertainty causing unpredictable risk consequences. As a result, executives instill risk management programs to assist in managing the organizations risks so they align with the company’s goals. Commonly sought goals include legal and regulatory compliance, tolerable uncertainty, survival, business continuity, earnings stability, profitability and growth, social responsibility and economy of risk management operations. Through the implementations of goal oriented programs, an organization can effectively minimize risk uncertainty. All organizations including financial institutions encounter risks from each risk

Risk management is a process for identifying, assessing and prioritizing risks of different kinds. Once the risks are identified, the risk manager will create a plan to minimize or eliminate the impact of negative events. A variety of strategies is available, depending on the type of risk and the type of business. There are a number of risk management standards including those developed by the Project Management Institute the International Organization for Standardization the National Institute of Science and Technology and actuarial societies. Organizations uses different strategies in proper management of future events such as risk assumption, risk avoidance,

For the small community bank, every action involves an amount of risk. A risk management program, which identifies, analyzes, treats, and monitors risks, is necessary for the bank’s operations. Mitigation strategies are implemented against potential losses or a bank failure. The executive in charge of developing and integrating the program is the Chief Risk Officer (CRO). The risk management program for the community bank addresses ten risks associated with Enterprise Risk Management (ERM) or traditional risk management processes, while attaining risk management goals.

Asymmetric information in lending is a huge risk. When there is misinformation from a lender to a borrower, this can cause a few different problems to arise; for example misinformation about job security or credit history from a borrower to a lender can result in late or missed payments, fraudulent spending of the money lent or the lending amount to be turned as bad debt. Specialization is a tool used for risk management. Specialization in lending helps reduce risk by gathering valuable and accurate information about the borrower. It

RBC engages a strong risk culture, with an understanding of risk awareness and responsibility. They use several methods to manage and alleviate their vulnerability to different types of risk. This bank’s risk-management process includes in-depth risk measurement, risk control, and risk governance, with setting the right risk culture at the top with their Board of Directors through their “Three Lines of Defence Model ,” (See Exhibit 4).

Collier (2009) claims that the fundamental role of the Board of the directors in a company is to apply risk management and to review the performance of the organisations’ internal control procedures; these two principal processes will support the Board in the setting of the strategic targets, the transformation of the targets into real products and services, the effective business overseeing, and the realistic reporting to the external stakeholders. Apart from the Board, the author suggests that an effective risk management framework must be facilitated by a risk management group, a chief risk officer, external and internal audits, and a mature organisational culture disseminated to the line managers and employees. Under the same concept, Hampton (2009) presented a flow gram that suggests the path towards the establishment of enterprise risk management, starting from the risk recognition and ending to the standardization of a risk evaluation process, having prior involved the Board, the risk owners and the accountable staff.

The first goal is tolerable uncertainty. According to Elliott (2012), keeping management assured whatever happens will be within anticipated bounds and effectively addressed. The developed risk management program has analyzed the risks for the community bank and aligned safeguards with the bank’s objectives. Accounting for the risk appetite of senior management guides the CRO. Through ERM and traditional risk management, risk financing techniques and the purchase of insurance mitigate the identified risks.

• Governance and oversight: Assessing business model and strategy changes and reinforcing the importance of sound corporate governance appropriate for the size and complexity of the individual bank. A specific focus will be on determining the adequacy of strategic, capital, and succession planning. Examiners will assess whether the plan is appropriate in light of the risks in new products or services. If applicable, examiners will assess the bank’s merger and acquisition processes and procedures.

One well accepted description of risk management is the following: risk management is a systematic approach to setting the best course of action under uncertainty by identifying, assessing, understanding, acting on and communicating risk issues. In order to apply risk management effectively, it is vital that a risk management culture be developed. The risk management culture supports the overall vision, mission and objectives of an organization. Limits and boundaries are established and communicated concerning what are acceptable risk practices and outcomes. Since risk management is directed at uncertainty related to future events and outcomes, it is

Risk management is the term applied to a logical and systematic method of establishing the context, identifying, analyzing, evaluating, treating, monitoring and communicating risks associated with any activity, function or process in a way that will enable organizations to minimize losses and maximize opportunities. (Lecture notes)Risk Management is also described as 'all the things you need to do to make the future sufficiently certain'. (The NZ Society for Risk Management, 2001)

A Bank is a financial intermediary that acts as an economic firm producing goods and services. With this view in mind it’s easy to see that a bank exists to make a profit. In order for a bank to be successful and make a profit, it has to take risk. A bank that is averse to risk will be a stagnant institution unable to adequately serve its customers effectively and produce a profit. However, a banking institution that takes excessive or unnecessary risk is also likely to run into trouble. All risk is uncertain but with bounds the probability of an outcome can be predicted using expectation. A bank can also run into trouble if it decides to take a

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The purpose of this research proposal is to discuss the role of risk management in an organization and examine the possibility of reassessing and implementing risk management.