User:Tazz013

Risk Management in the Banking Sector

Introduction

The basics of risk.

Risk is defined as the exposure to the chance that a loss or damages could occur. Risk could take place in any aspect of life, whether in the business world, our personal lives or day to day activities. Every day one is exposed to risks of different degrees. While some risks may be insignificant, other risks could have an important impact on the way lives are live (1). There are two ingredients for risks to exist, one is that there has to be uncertainty about potential outcomes for an experiment or activity and the other is that the outcomes have to matter in providing utility. (Holton, 2004) .One also needs to make a distinction between risk and probability. Probability is the likelihood of the event occurring while risk incorporates the likelihood of the event occurring as well as the consequences of the event. With regards to the business world, one has to be aware of the risks and their effect in order to steer the business to success (2). One needs to look at risks with regards to internal risk pressures (risks that occur within the organization) and external risk pressures (risks that occur due to factors outside the business environment). A few common internal risks that all businesses will face is one stability, if the business can manage its finances,two organizational structure, if the business has an organizational structure in place that will enhance success and internal politics and mismanagement which could include lack of control over resources.(2)

The basics of risk management.

When looking at risks one needs to decide how to manage risks. Management itself is the co ordination or organization of different activities in order to achieve a common goal. There are four possibilities or actions on can take when faced with a risk. One can choose to abandon the risk if the risk too high or costly to attain. One can transfer the risk to a third party for example insurance, this acts a safeguarding technique. One can choose to reduce the risk for example through diversification or risk hedging, or one can choose to do nothing if the costs to eliminate the risk are too costly or if the risk itself doesn’t have such significant impact. The four above actions are different ways in which one can manage risks. In the business world entities need to manage risks according to the return they will receive from taking a particular risk.