Risk concerns the expected value of one or more results of one or more future events. Technically, the value of those results may be positive or negative. However, general usage tends focus only on potential harm that may arise from a future event, which may accrue either from incurring a cost (downside risk) or failing to attain any benefit (upside risk). Risk management can be considered the identification, assessment, prioritization of risks followed by coordinated and economical application of resources to minimize, monitor and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities.
Asset Liability Management: The Asset Liability Management is integral part of Bank Management. This risk is related to the balance sheet gaps, interest rate gaps that can lead to under performance. To manage this risk Bank has a committee name ALCO (Asset Liability Committee) which usually meet at least once a month to analysis, review and formulate strategy to manage the balance sheet. Main functions of this committee are identifying the balance sheet management issues like balance sheet gap, interest rate gap profile, reviewing deposit-pricing strategy and liquidity contingency plan.
Foreign Exchange Risk: Today’s financial institutions engage in activities starting from import, export and remittance to complex derivatives involving basic foreign exchange and money market to complex structured products. All these require high degree of expertise that is difficult to achieve in the transaction originating departments and as such the expertise is housed in a separate department. this task is done by Treasury Department. Treasury department watches over the flow of foreign exchange, it takes long and short position of foreign currency to mitigate the risk of depreciation of the hold currencies.
Internal Control and Compliance Risk: Internal control is the process, affected by a company’s board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the effectiveness and of operations, the reliability of financial reporting and compliance with applicable laws, regulations, and internal policies. In every bank the responsibilities of internal control are to check the efficiency and effectiveness of activities, reliability, completeness and timeliness of financial and management information etc.
Money Laundering Risk: Though money laundering risk is relatively a old phenomenon, it got the organized look after the enactment of Money Laundering. This cause some activities as legal and if any bank is found to be involved in any kind of money laundering, the concerned official and the bank will be punished. As, money laundering is very common, it poses a great risk for the banks. To mitigate this risk, bank employed a strong KYC (Know Your Customer) policy, strong account monitoring policy etc.
Credit Risk: This is the most important risk of all as it involves the key asset quality of any bank. Credit Risk is defined as the risk of losses associated with the possibility that borrower will fail to meet its obligations; in other words it is the risk that the borrower won’t repay what is owed. Many banks have failed in the past because of poor management of credit risk. To understand credit risk, it is important to know about the credit facilities.