Risk Management in Financial Institutions for Beginners

Risk Management in Financial Institutions for Beginners – In the finance world, risk management is very important. It is the process of avoiding uncertainties in investment decisions. Financial analysts identify, analyze and develop solutions to possible risks to investments.

This is why investors buy government’s low–risk bonds rather than the riskier corporate bonds. It is also the reason banks do a credit check before issuing loans. They are all trying to mitigate/manage possible risks.

These risks can be uncertainties in the financial markets, legal liabilities, events of unpredictable causes. The goal of risk management is to avoid these risks or at least manage the possible fall out.

Risk Management in Financial Institutions for Beginners
Vector Risk management process diagram schema

Risk management principles

Various organizations including international standards organization (ISO) has developed standards for ways of risk management.

These standards/principles create a framework for other companies to use as a benchmark for their risk treatment.

The following are the ISO recommended standards:

  1. Any risk management procedure must create value for the company
  2. Be systematic and well-structured in execution
  3. It must be part of the organizational decision-making process
  4. It must be transparent and conclusive
  5. The whole process must be based on the available information

To read more on the ISO risk management principles check out the ISO 31000 2009 click here

Risk Management Processes

Here are the steps to risk management processes:

  1. Risk identification: this is a very crucial part of a company’s risk management process. Here potential risks including events that when triggered could cause problems or benefits for the company are assessed.
  2. Risk analysis: immediately the possible risks are identified, the next step is to scrutinize the risk further. Check out its chances of occurring and possible consequences.
  3. Risk assessment and evaluation: after identifying the possibility of the risk occurring and its possible damage, you also need to assess and evaluate if the company can handle such risk.
  4. Then, risk mitigation: At this point, companies have to develop risk control plans from their initial assessment. This plan should be according to the priority of the risk with the most impact. The new plan has to cover mitigation processes, contingency plans, and risk prevention tactics.

Risk Management in Financial Institutions for Beginners

This type of risk management is more specialized to financial institutions like banks. It focuses on developing a plan of how and when these institutions should hedge their funds.

This is done using special financial instruments to manage any possible exposure. Possible financial exposures include; credit risk, foreign exchange risk, liquidity risk, legal risk, etc.

And like normal risk management, this also requires the same processes to mitigate its chances of occurrence. The banks adhere to a different approach to risk management principles. Furthermore, they adopted a resolution from the Basel Accords as a benchmark for tracking, reporting and managing their risks.

In summary, organizations big or small must have to seriously develop a robust risk management plan to help mitigate and manage possible risks.

In this article, we have outlined key points on issues relating to risk management, and we highly recommend you take proper steps to manage your organization risks.

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