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RISK MANAGEMENT IN BANKS

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ST. ANDREWS COLLEGE .

SYBBI

GROUP-3


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SEMESTER IV

ACKNOWLEDGEMENT It gives us immense pleasure in acknowledgement the valuable and co-operativeassistance extended to us by the various individuals who have helped ussuccessfully in completing our project.

First of all we would like to thank the Mumbai University for giving us this

opportunity to study the subject of financial market.

We would like to show our gratitude to our Professor Patricia Pereira for her valuable assistance, encouragement and support on the topic RISK MANAGEMENT IN BANKS.

We would also like to thank all the students for their active co-operation. Theinformation has helped us gain practical understanding of the object.

Lastly we would like to thank our parents, friends and colleagues who havesupported us during the making of this project.

It is the encouragement of all these people that has made us proceed towardsachieving our goals.


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DECLARATION We the members of Group no. 3 of St. Andrews College, Bandra of S.Y.B.Com ( Banking And Insurance), hereby declare that we completed the project on thetopic of RISK MANAGEMENT IN BANKS in the Academic year ( 2012-2013 ).The information submitted here in is true, to the best of your knowledge.

GROUP MEMBERS

Name Roll. No. SignatureDmello Cheryl 8105Suppaya Esaiwani 8114Lasrado Trishala 8123Mathias Roswald 8129Mungse Saylee 8134

Pereira Yolanda 8140Quadri Roydon 8142Swamy Someshwari 8149

Lakra Nisha 8153


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INDEX

SR.no TOPIC PAGE NO.1. Introduction 52. Meaning 6

3. Types of risk 7-154. Risk management process

16-17

5. Financial risk management

18

6. Liquidity risk management

19

7. Risk management framework

20-21

8. Operational risk 229. Risk management system

in banks

23-25

10. Conclusion 26


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MEANING OF RISK

Risk is the possibility of something unpleasant happening or the chance of encountering loss or harm. Risk provides the basis for opportunity. The terms risk and exposure have subtle differences in their meaning. Risk refers to the

probability of loss, while exposure is the possibility of loss, although they are oftenused interchangeably. Risk arises as a result of exposure. Exposure to financialmarkets affects most organizations, either directly or indirectly. When anorganization has financial market exposure, there is a possibility of loss but also anopportunity for gain or profit. Financial market exposure may provide strategic or competitive benefits. Risk is the likelihood of losses resulting from events such aschanges in market prices. Events with a low probability of occurring, but thatmay result in a high loss, are particularly troublesome because they areof ten no t an t i c ipa ted . Pu t ano ther way, r i sk i s the p robab leva ri ab il it y o f returns. Since it is not always possible or desirable toeliminate risk, understanding it is an important step in determining how tomanage it. Identifying exposures and risks forms the basis for an appropriatefinancial risk management strategy. Financial risk arises through countlesstransactions of a financial nature , including sales and purchases,

investments and loans, and various other business activities.

. DEFINITION The identification, analysis, assessment, control, and avoidance, minimization, or elimination of unacceptable risks. An organization may use risk assumption, risk avoidance, risk relation, risk transfer, or any other strategy in proper managementof future events.


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Systematic risk is uncontrollable by an organization and macro in nature.

Unsystematic risk is controllable by an organization and micro in nature.

Systematic Risk

Systematic risk is due to the influence of external factors on an organization. Suchfactors are normally uncontrollable from an organization's point of view.

Systematic risk is a macro in nature as it affects a large number of organizationsoperating under a similar stream or same domain. It cannot be planned by theorganization.

Types of risk under the group of systematic risk are listed as follows:

1. Interest rate risk.2. Market risk.3. Purchasing power or Inflationary risk.

The types of risk grouped under systematic risk are depicted below .
http://lh5.googleusercontent.com/-64dBMtOISq8/Tx9KC5eaD6I/AAAAAAAAFpg/ytuR-nFhUAY/s800/Types-of-Risk.pnghttp://lh5.googleusercontent.com/-64dBMtOISq8/Tx9KC5eaD6I/AAAAAAAAFpg/ytuR-nFhUAY/s800/Types-of-Risk.png


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Now let's discuss each risk classified under the group of systematic risk.

1. Interest rate risk

Interest-rate risk arises due to variability in the interest rates from time to time. It particularly affects debt securities as they carry the fixed rate of interest.

The interest-rate risk is further classified into following types.

1. Price risk.2. Reinvestment rate risk.

The types of interest-rate risk are depicted below.
http://lh5.googleusercontent.com/-RmA3PcLBBeY/Tx9UXM0pqyI/AAAAAAAAFp8/yoo4bbOSh6g/s800/Interest-Rate-Risk.pnghttp://lh5.googleusercontent.com/-kA9VWLSjI8s/Tx9Q6VqkBcI/AAAAAAAAFps/7aX16rWxtQo/s800/Systematic-Risk.pnghttp://lh5.googleusercontent.com/-RmA3PcLBBeY/Tx9UXM0pqyI/AAAAAAAAFp8/yoo4bbOSh6g/s800/Interest-Rate-Risk.pnghttp://lh5.googleusercontent.com/-kA9VWLSjI8s/Tx9Q6VqkBcI/AAAAAAAAFps/7aX16rWxtQo/s800/Systematic-Risk.png


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The meaning of various types of interest-rate risk is discussed below.

Price risk arises due to the possibility that the price of the shares, commodity,investment, etc. may decline or fall in the future.

Reinvestment rate risk results from fact that the interest or dividend earned froman investment can't be reinvested with the same rate of return as it was acquiringearlier.

2. Market risk

Market risk is associated with consistent fluctuations seen in the trading price of any particular shares or securities. That is, it is a risk that arises due to rise or fallin the trading price of listed shares or securities in the stock market.

The market risk is further classified into following types.

1. Absolute risk.2. Relative risk.3. Directional risk.4. Non-directional risk.5. Basis risk.

6. Volatility risk.The types of market risk are depicted in the following diagram.
http://lh5.googleusercontent.com/-ReXrqwiI6FY/Tx9aZIBxQ5I/AAAAAAAAFqI/Ze_xjU2iYj0/s800/Market-Risk.png


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The meaning of different types of market risk is briefly discussed below.

Absolute Risk is the risk without any content. For e.g., if a coin is tossed, there isfifty percentage chance of getting a head and vice-versa.

Relative risk is the assessment or evaluation of risk at different levels of businessfunctions. For e.g. a relative risk from a foreign exchange fluctuation may behigher if the maximum sales accounted by an organization are of export sales.

Directional risks are those risks where the loss arises from an exposure to the particular assets of a market. For e.g. an investor holding some shares experience aloss when the market price of those shares falls down.

Non-Directional risk arises where the method of trading is not consistentlyfollowed by the trader. For e.g. the dealer will buy and sell the sharesimultaneously to mitigate the risk.

Basis risk is due to the possibility of loss arising from imperfectly matched risks.For e.g. the risks which are in offsetting positions in two related but non-identicalmarkets.

Volatility risk is the risk of a change in the price of securities as a result of changesin the volatility of a risk factor. For e.g. volatility risk applies to the portfolios of derivative instruments, where the volatility of its underlying is a major influence of

prices.3. Purchasing power or inflationary risk

Purchasing power risk is also known as inflation risk. It is so, since it emanates(originates) from the fact that it affects a purchasing power adversely. It is notdesirable to invest in securities during an inflationary period.

The purchasing power or inflationary risk is classified into following types.

1. Demand inflation risk.2. Cost inflation risk.

The types of purchasing power or inflationary risk are depicted below.


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Demand inflation risk arises due to increase in price, which result from an excessof demand over supply. It occurs when supply fails to cope with the demand andhence cannot expand anymore. In other words, demand inflation occurs when

production factors are under maximum utilization.

Cost inflation risk arises due to sustained increase in the prices of goods andservices. It is actually caused by higher production cost. A high cost of productioninflates the final price of finished goods consumed by people .

Unsystematic Risk

Unsystematic risk is due to the influence of internal factors prevailing within anorganization. Such factors are normally controllable from an organization's point of view.

Unsystematic risk is a micro in nature as it affects only a particular organization. Itcan be planned, so that necessary actions can be taken by the organization tomitigate (reduce the effect of) the risk.

The types of risk grouped under unsystematic risk are depicted below.

1. Business or liquidity risk.2. Financial or credit risk.3. Operational risk.

The types of risk grouped under unsystematic risk are depicted below.
http://lh3.googleusercontent.com/-NhYvgAcyaEM/Tx9cwH-_PeI/AAAAAAAAFqU/EUmqBJv5GaY/s800/Purchasing-Power-or-Inflationary-Risk.pnghttp://lh3.googleusercontent.com/-NhYvgAcyaEM/Tx9cwH-_PeI/AAAAAAAAFqU/EUmqBJv5GaY/s800/Purchasing-Power-or-Inflationary-Risk.png


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Now let's discuss each risk classified under the group of unsystematic risk.

1. Business or liquidity risk

Business risk is also known as liquidity risk. It is so, since it emanates (originates)from the sale and purchase of securities affected by business cycles, technologicalchanges, etc.

The business or liquidity risk is further classified into following types.

1. Asset liquidity risk.2. Funding liquidity risk.

The types of business or liquidity risk are depicted and explained below.

.

Asset liquidity risk is the risk of losses arising from an inability to sell or pledgeassets at, or near, their carrying value when needed. For e.g. assets sold at a lesser value than their book value.
http://lh6.googleusercontent.com/-9mMKhxfA_Ak/Tx9kzN969hI/AAAAAAAAFqs/ryaydEPUlxQ/s800/Business-or-Liquidity-Risk.pnghttp://lh5.googleusercontent.com/-tEPAyOXbh-o/Tx9g7yfuooI/AAAAAAAAFqg/HdSIt195WK8/s800/Unsystematic-Risk.pnghttp://lh6.googleusercontent.com/-9mMKhxfA_Ak/Tx9kzN969hI/AAAAAAAAFqs/ryaydEPUlxQ/s800/Business-or-Liquidity-Risk.pnghttp://lh5.googleusercontent.com/-tEPAyOXbh-o/Tx9g7yfuooI/AAAAAAAAFqg/HdSIt195WK8/s800/Unsystematic-Risk.png


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Funding liquidity risk is the risk of not having an access to sufficient funds tomake a payment on time. For e.g. when commitments made to customers are notfulfilled as discussed in the SLA (service level agreements).

2. Financial or credit risk

Financial risk is also known as credit risk. This risk arises due to change in thecapital structure of the organization. The capital structure mainly comprises of three ways by which funds are sourced for the projects.

These are as follows:

1. Owned funds. For e.g. share capital.2. Borrowed funds. For e.g. loan funds.3. Retained earnings. For e.g. reserve and surplus.

The financial or credit risk is further classified into following types.

1. Exchange rate risk.2. Recovery rate risk.3. Credit event risk.4. Non-Directional risk.5. Sovereign risk.6. Settlement risk.

The types of financial or credit risk are depicted and explained below.

Exchange rate risk is also called as exposure rate risk. It is a form of financial risk that arises from a potential change seen in the exchange rate of one country'scurrency in relation to another country's currency and vice-versa. For e.g. investors
http://lh5.googleusercontent.com/-8D-rCcIgdnk/Tx9m4zReMzI/AAAAAAAAFq4/X7NXCfuMbgk/s800/Financial-or-Credit-Risk.png


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or businesses face an exchange rate risk either when they have assets or operationsacross national borders, or if they have loans or borrowings in a foreign currency.

Recovery rate risk is an often neglected aspect of a credit risk analysis. Therecovery rate is normally needed to be evaluated. For e.g. the expected recoveryrate of the funds tendered (given) as a loan to the customers by banks, non-bankingfinancial companies (NBFC), etc.

Sovereign risk is the risk associated with the government. In such a risk,government is unable to meet its loan obligations, reneging (to break a promise) onloans it guarantees, etc.

Settlement risk is the risk when counterparty does not deliver a security or itsvalue in cash as per the agreement of trade or business.

3. Operational risk

Operational risks are the business process risks failing due to human errors. Thisrisk will change from industry to industry. It occurs due to breakdowns in theinternal procedures, people, policies and systems.

The operational risk is further classified into following types.

1. Model risk.

2. People risk.3. Legal risk.4. Political risk.

The types of operational risk are depicted and explained below.
http://lh4.googleusercontent.com/-EmF9Bx1tOgo/Tx9otvFG84I/AAAAAAAAFrE/aR7spNuV1GY/s800/Operational-Risk.png


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Model risk is the risk involved in using various models to value financialsecurities. It is due to probability of loss resulting from the weaknesses in thefinancial model used in assessing and managing a risk.

People risk arises when people do not follow the organizations procedures, practices and/or rules. That is, they deviate from their expected behavior.

Legal risk arises when parties are not lawfully competent to enter an agreementamong themselves. Furthermore, this relates to regulatory risk, where a transactioncould conflict with a government policy or particular legislation (law) might beamended in the future with retrospective effect.

Political risk is the risk that occurs due to changes in government policies. Suchchanges may have an unfavorable impact on an investor. This risk is especially

prevalent in the third-world countries.


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RISK MANAGEMENT PROCESS

The process of financial risk management is an ongoing one. Strategies need to beimplementedand refin ed as the marke t and requ ireme nts chan ge. Ref inements may reflect changingexpectations about market rates, changes tothe business environment, or changing international political conditions, for example. In general, the process can be summarized as follows:

Identify and prioritize key financial risks.

Determine an appropriate level of risk tolerance

. Implement risk management strategy in accordance with policy

. Measure, report, monitor, and refine as needed. Risk management needs to belooked at as an organizational approach, as management of risks independentlycannot have the desired effect over the long term. This is especially necessary asrisks result from various activities in the firm and the personnel responsible for theactivities do not always understand the risk attached to them. The steps in risk management process are:

1. Deter mi ni ng objectives: - de te rmina t ion o f ob jec t ives i s the f i r s t s t ep in therisk management function. The objective may be to protect profits, or to developcompetitivea d v a n t a g e . T h e o b j e c t i v e o f r i s k m a n a g e m e n t n e e d sto be decided upon by themanagement. So that the risk manager may

fulfill his responsibilities in accordance with the set objectives.

2. I denti fying Risks Every organization faces different risks, based on its business, theeconomic, social and political factors, the features of the industry it operates in like the degree of competition, the strengths and weakness of its competitors,availability of raw m at eri al , fac to rs int ern al to t he co mpa ny li ke th ecompetence and outlook of the management, state of industry relations,


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dependence on foreign markets for inputs, sales or finances, capabilities of its staff and other innumerable factors.

3 . R i s k E v a l u a t i o n : - O n c e t h e r i s k s a r e i d e n t i f i e d , t h e y n e e d t o b e e v a l u a t e d f o r ascertaining their significance. The significance of a particular risk depends uponthe size of the loss that it may result in, and the probability of the occurrence of such loss. On the basis of these factors, the various r isks faced by thecorporate need to be classified as critical risks, important risks and not-so-important risks. Critical risks are those that may result in bankruptcy of thefi rm. Imp ort an t r isk s ar e th ose th at may not res ult in bankruptcy, butmay cause severe financial distress.

4 . D e v e l o p m e n t o f p o l i c y : - B a s e d o n t h e r i s k t o l e r a n c e o e v e l o f t h e f i r m , t h e r i s k ma nagement po l i cy needs to be deve loped . The t ime f rame of the

po l i c y shou ld be comparat ively long , so that the policy is re la tivelystable. A policy generally takes the form of a declaration as to how much risk should be covered.

5 . D e v el o p m e n t o f st r a t eg y : - Based on the policy, the f irm then needs to develop the strategy to

be followed for managing risk. A strategy is essentially an action plan, whichspecifies the nature of risk to be managed and the timing. It alsospecifies the tools, techniques and instruments that can be used to manage theserisks. A strategy also deals with tax and legal problems. Another importantissue that needs to be specified by the strategy is whether the companywould try to make profit s out of risk management or would it stick to co6.

6.I mplementat ion: - O n c e t h e p o l i c y a n d t h e s t r a t e g y a r e i n p l a c e , t h e y a r e t o be i mplemented fo r ac tua l ly manag ing the r i sks . Th i s i s the opera t i

ona l pa r t o f r i sk management . I t i nc ludes f ind ing the bes t dea l incase o f r i sk t r ans fe r, p rov id ing fo r con t ingenc ies in case o f r isk retention, designing and implementing r isk control programsetc.


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FINANCIAL RISK MANAGEMENT

B r o a d l y s p e a k i n g , r i s k m a n a g e m e n t c a n b e d e f i n e d a s a d i s ci p l i n e f o r L i v i n g w i t h t h e possibility that future events may causeadverse effects. In the context of risk managementinf inancia l ins t i tu t ions such as banks or insurance companies these adverse e ffec t s usua l lycor respond to l a rge losses on a por t fo l ioof ass ets . Spe cif ic exa mpl es in clu de: los ses on a portfolio of market-traded securities such as stocks and bonds due to falling market prices (a so-calledmarket risk event); losses on a pool of bonds or loans, caused by thedefault of some issu ers or borr ower s (cre dit r isk) ;losses on a por t fo l io of in surance contrac ts due to the occurrence of large claims (insurance- or underwriting risk). An additional risk category is operational risk, which includes losses resulting frominadequate or failed internal processes ,fraud or litigation . In financialmarkets, there is in general no so- called free lunch or, in other words,no profit without risk. This is the reason why financial institutionsactively take on risks. The role of financial risk management is to measure andmanage these risks. Hence risk management can be seen as a core competenceof an insurance company or a bank: by using its expertise and its capital, a

financial institution can take on risks and manage them by various techniques suchas diversification, hedging, or repackaging risks and transferring them back tomarkets, etc.


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LIQUIDITY RISK MANAGEMENT Liquidity risk refers to multiple dimensions such as (a) inability to raise funds atnormal cost (b) market liquidity risk, and (c) asset liquidity risk. The marketliquidity risk arises out of illiquidity in the market while asset liquidity risk iscaused by inability to sell the asset immediately. Funding risk depends on howrisky the market perceives the issuer and its funding policy. The cost of funding isa critical profitability driver. The cost of the funds depends on the banks creditstanding. In addition the rating drives the ability to do business with other

banks/financial institutions and to attract investors. The liquidity risk of the marketrelates to liquidity crunches because of lack of volume. In such a scenario, the

prices become highly volatile, sometimes embedding high discounts for par, whencounter parties are unwilling to trade. Market liquidity risk materializes as animpaired ability to raise money at a reasonable cost. Asset liquidity risk results

from the lack of liquidity related to the nature of assets rather than to the marketliquidity. In fluctuating market liquidity, holding a pool of liquid assets act as acushion to meet short term obligations.When a bank gets into trouble, massive withdrawals of funds by depositors andclosing of credit-lines by institutions results in brutal liquidity crises, ending up in

bankruptcy of bank.There are challenges to liquidity risk measurement. The practices rely on empiricaland continuous observations of market liquidity. Liquidity risk models appear tootheoretical to permit instrumental applications. The time profiles of projected usesand sources of funds, and their gaps or liquidity mismatches, capture the liquidity

position of a bank


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RISK MANAGEMENT FRAMEWORK

The risk-based approach to security control selection and specification considers

effectiveness, efficiency, and constraints due to applicable laws, directives,Executive Orders, policies, standards, or regulations. The following activitiesrelated to managing organizational risk (also known as the Risk M anagement Framework ) are paramount to an effective information security program and can

be applied to both new and legacy information systems within the context of thesystem development life cycle and the Federal Enterprise Architecture:

The Risk Management Framework (RMF), illustrated at right, provides adisciplined and structured process that integrates information security and risk management activities into the system development life cycle.

The RMF steps include: Categorize the information system and the information processed, stored, and

transmitted by

that system based on an impact analysis.

Select an initial set of baseline security controls for the information system based on the

security categorization; tailoring and supplementing the security control baseline as

needed based on an organizational assessment of risk and local conditions. Implement the security controls and describe how the controls are employed

within the

information system and its environment of operation.

Assess the security controls using appropriate assessment procedures todetermine the extent

to which the controls are implemented correctly, operating as intended, and producing the desired outcome with respect to meeting the security requirementsfor the system.

Authorize information system operation based on a determination of the risk to

organizational operations and assets, individuals, other organizations, and the Nation resulting from the operation of the information system and the decision thatthis risk is acceptable.


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Monitor the security controls in the information system on an ongoing basisincluding

assessing control effectiveness, documenting changes to the system or itsenvironment of operation, conducting security impact analyses of the associated

changes, and reporting the security state of the system to designated organizationalofficials.
http://en.wikipedia.org/wiki/File:Risk_Management_Framework.svg


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OPERATIONAL RISK An operational risk is an adverse event or outcome, which occurs as aconsequence of a organizations activity.

Operational risk is the broad discipline focusing on the risks arising from the people, systems and processes through which a company operates. It can alsoinclude other classes of risk, such as fraud, legal risks, physical or environmentalrisks.

A widely used definition of operational risk is the one contained in the BaselII regulations. This definition states that operational risk is the risk of lossresulting from inadequate or failed internal processes, people and systems, or fromexternal events.

Operational risk management differs from other types of risk, because it is not used

to generate profit (e.g. credit risk is exploited by lending institutions to create profit, market risk is exploited by traders and fund managers, and insurance risk isexploited by insurers). They all however manage operational risk to keep losseswithin their risk appetite - the amount of risk they are prepared to accept in pursuitof their objectives. What this means in practical terms is that organisations acceptthat their people, processes and systems are imperfect, and that losses will arisefrom errors and ineffective operations. The size of the loss they are prepared toaccept, because the cost of correcting the errors or improving the systems isdisproportionate to the benefit they will receive, determines their appetite for operational risk.

Determining appetite for operational risk is a discipline which is still in its infancy.Some of the issues and considerations around this process are outlined in thisSound Practice paper published by the Institute for Operational Risk in December 2009.
http://en.wikipedia.org/wiki/Fraudhttp://en.wikipedia.org/wiki/Legal_riskhttp://en.wikipedia.org/wiki/Basel_IIhttp://en.wikipedia.org/wiki/Basel_IIhttp://en.wikipedia.org/wiki/Credit_riskhttp://en.wikipedia.org/wiki/Market_riskhttp://en.wikipedia.org/wiki/Market_riskhttp://en.wikipedia.org/wiki/Credit_riskhttp://en.wikipedia.org/wiki/Basel_IIhttp://en.wikipedia.org/wiki/Basel_IIhttp://en.wikipedia.org/wiki/Legal_riskhttp://en.wikipedia.org/wiki/Fraud


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RISK MANAGEMENT SYSTEMS IN BANKS

Risk is inherent and absolutely unavoidable in banking. Risk is the potential lossan asset or a portfolio is likely to suffer due to a variety of reasons. As a financialintermediary, bank assumes or restructures risks for its clients. A simple examplefor this would be acceptance of deposits. A more sophisticated example is aninterest rate swap. A bank while operating on behalf of the customers as well as onits own behalf, has to face various types of risk associated with those transactions.Prudent banking lies in identifying, assessing and minimizing these risks. In acompetitive market environment, a banks rate of return will be greatly influenced

by its risk management skills.

Risk In Banking

Risks in banking are many. These risks can be broadly classified into 3 categories

1)Balance sheet risks:

The Balance Risk generally arises out of the mismatch between the currency,maturity and interest rate structure of assets and liquidities resulting in,

1. Interest Rate mismatch risk

2. Liquidity Risk, and

3. Foreign Exchange Risk,

2)Transactional Risk:

The Transactional Risk essentially involves 2 types of risks. They are:

1. Credit Risk which is the risk of loss on lending/investment, etc., due to counter party default.

2. Price Risk which include risk of loss due to change in value of Assets andLiabilities. The factors contributing to price risks are:


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a) Market Liquidity Risk: This is the risk of lack of liquidity of an instrument or asset or the loss one is likely to incur while liquidating the assets in the market dueto the fluctuations in prices.

b) Issuer Risk: The financial strength and standing of the institution/sovereign thathas issued the instrument can affect price as well as reliability. The risk involvedwith the instrument issued by corporate bodies would be an ideal example in thiscontext.

c) Instruments Risk: The nature of instrument creates risks for the investor. Withmany hybrid instruments in the market, and with fluctuation in market conditions,the prices of various instruments may react differently from one another

d) Changes in commodity prices, interest rates and exchange rates may affect therealizable value or yield of many assets when transactions take place.

3) Operating and Liquidity risks:

The Operating and Liquidity Risk encompasses 2 types of risks

1. Risk of loss due to technical failure to execute or settle a transaction , and

2. Risk of loss due to adverse changed in the cash flows of transactions.


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Risk Management: Objectives

The objectives of risk management for any organization can be summarized asunder:

(a)Survival of the organization,

(b)Efficiency in operations,

(c)Identifying and achieving acceptable levels of worry,

(d)Earnings stability,

(e)Uninterrupted operations,

(f)Continued growth , and(g)Preservation of reputation.

Risk Management: Components

Risk management may be defined as the process of identifying and controllingrisk. It is also described at times as the responsibility of the management to identifymeasure, monitor and control various items of risk associated with banks positionand transaction. The process of risk management has three clearly identifiable

steps, Risk identification. Risk measurement and Risk control.

Risk Control:

After identification and assessment of risk factors, the next step involved is risk control. The major alternatives available in risk control are:

1. Avoid the exposure.2. Reduce the impact by reducing frequency of severity.3. Avoid concentration in risky areas.4. Transfer the risk to another party.5. Employ risk management instrument to cover the risks.


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CONCLUSION The significant transformation of the banking industry in India is clearly evidentfrom the changes that have occurred in the financial markets, institutions and

products. While deregulation has opened up new vistas for banks to argumentrevenues, it has entailed greater competition and consequently greater risks. Cross- border flows and entry of new products, particularly derivative instruments, haveimpacted significantly on the domestic banking sector forcing banks to adjustthe product mix, as also to effect rapid changes in their processes and operations inorder to remain competitive to the globalized environment. These developmentshave facilitated greater choice for consumers, who have become more discerningand demanding compelling banks to offer a broader range of products throughdiverse distribution channels. The traditional face of banks as mere financialintermediaries has since altered and risk management has emerged as their definingattribute.Currently, the most important factor shaping the world is globalization. The

benefits of globalization have been well documented and are being increasinglyrecognized. Integration of domestic markets with international financial marketshas been facilitated by tremendous advancement in information andcommunications technology. But, such an environment has also meant that a

problem in one country can sometimes adversely impact one or more countriesinstantaneously, even if they are fundamentally strong.


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BIBILOGRAPHY

Risk management in banks S. Singh & Yogesh Singh.

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