lOMoARcPSD|17375464
Risks
Financial institutions and markets (KCA University)
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MANAGEMENT OF RISKS IN BANKING
1.0 Management of Risks in Banking
Financial risk in a banking organization is the possibility that the outcome of
an action or event could bring about adverse impacts on the institution’s
capital or earnings. Such outcomes could either result in direct loss of
earnings/capital or may result in imposition of constraints on bank’s ability to
meet its business objectives.
Risk Management-The risk Management process in banks involves the
identification, evaluation, monitoring and controlling or mitigating of all
material risks and to assess their overall capital adequacy in relation to their
risk profile. This process should match with the size and complexity of the
bank. E.g. Barclays bank Kenya is a big bank which is in Tier 1 and so the
risks management process will be different from a small bank like Jairobank
which is in Tier 3.
2.0 Risk Management Process
The overall risk management in banks consists of the following processes:
Risk Identification: Almost every product and service offered by banks
has a unique risk profile composed of multiple risks. For example, at least
four types of risks are usually present in most loans: credit risk, interest
rate risk, liquidity risk and operational risk. Risk identification should be a
continuing process and risk should be understood at both the transaction
and portfolio levels.
Risk Measurement: Once the risks associated with a particular activity
have beenidentified, the next step is to measure the significance of each
risk. Each risk is viewed in terms of its three dimensions: size, duration
and probability of adverse occurrences. Accurate and timely
measurement of risk is essential to effective risk management systems.
Risk Control: Once risks have been identified and measured for
significance, there are basically three ways to control significant risks, or
at least minimize their adverse consequences: avoiding or placing limits
on certain activities/risks, mitigating risks and/or offsetting risks. It is a
Downloaded by Anonymous Granny ()
Risks
Financial institutions and markets (KCA University)
Scan to open on Studocu
Studocu is not sponsored or endorsed by any college or university
Downloaded by Anonymous Granny ()
, lOMoARcPSD|17375464
MANAGEMENT OF RISKS IN BANKING
1.0 Management of Risks in Banking
Financial risk in a banking organization is the possibility that the outcome of
an action or event could bring about adverse impacts on the institution’s
capital or earnings. Such outcomes could either result in direct loss of
earnings/capital or may result in imposition of constraints on bank’s ability to
meet its business objectives.
Risk Management-The risk Management process in banks involves the
identification, evaluation, monitoring and controlling or mitigating of all
material risks and to assess their overall capital adequacy in relation to their
risk profile. This process should match with the size and complexity of the
bank. E.g. Barclays bank Kenya is a big bank which is in Tier 1 and so the
risks management process will be different from a small bank like Jairobank
which is in Tier 3.
2.0 Risk Management Process
The overall risk management in banks consists of the following processes:
Risk Identification: Almost every product and service offered by banks
has a unique risk profile composed of multiple risks. For example, at least
four types of risks are usually present in most loans: credit risk, interest
rate risk, liquidity risk and operational risk. Risk identification should be a
continuing process and risk should be understood at both the transaction
and portfolio levels.
Risk Measurement: Once the risks associated with a particular activity
have beenidentified, the next step is to measure the significance of each
risk. Each risk is viewed in terms of its three dimensions: size, duration
and probability of adverse occurrences. Accurate and timely
measurement of risk is essential to effective risk management systems.
Risk Control: Once risks have been identified and measured for
significance, there are basically three ways to control significant risks, or
at least minimize their adverse consequences: avoiding or placing limits
on certain activities/risks, mitigating risks and/or offsetting risks. It is a
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