Out of several things determining the success of the business, the ability to manage the financial risk is also an important factor. Failing to manage the financial risk has lead to the failure of many big companies. MF Global bankruptcy is one of the greatest examples of failure where the company made several attempts to raid the customers’ account to meet the financial obligations (heartland.org, 2012). The company's inability to manage the financial risk caused the loss of million dollars to the customers, and the company turned out to be bankrupt (Till, 2012). This paper explains about various techniques explained by Dr. James Kallman in his paper. Apart from that, the paper will take the viewpoint put forward by Anthony Carey regarding the identification and management of the financial risk.
Dr. James Kallman is one of the top experts in financial risk management and is also a professor of financial risk management at Kaplan University. In his articles “Financing Risk Retention”, Dr. Kallman has highlighted the importance of the financial risk managers in the company. According to him, these managers work to prevent and reduce the risk while they enable and enhance the project’s return by managing the risk. As a result of this, the value creation is possible (Kallman, 2008). Retention is one of the common technique of managing the financial risk that is especially used when the value of loss are estimated to be very small. “Risk retention consists of five categories as current expensing, borrowing, reserving, state qualified self-insurance plan (SIP), and captives” (Kallman, 2008).
When the probability and value of the loss are very low from the particular project that does not put severe threat on the liquidity, then current expensing is dominant. The loss in current expensing is tax deductible on the income statement while the borrowing technique is used in case of larger projects but still have very low loss probability (Ioan & Bent, 2012). By implementing the borrowing technique, the company can acquire funds by two ways either by issuing bonds or by obtaining the line of credit from the financial institutions with which they can obtain required fund when needed (Kallman, 2008). When the reserving technique is used, then the business generally sets aside a fund that is equal to the sum of the estimated value of loss and the amount equal to standard deviation. When the project bears the probability of loss to be medium but the value of the loss is less then this method is employed. State qualified SIPs are often the statutory obligations that need to be provisioned for the workers’ compensation. The last technique is called the captives. It is also viewed as similar to insurance. As like insurance reduces the risk of loss for the public, a captive is similar to insurance to finance the risk (Kallman, 2008).
In his paper, Dr. Kallman has discussed the various specific techniques used for managing risk. But, on the other side Anthony Carey has discussed some general techniques and approaches that can be used by financial institutions to manage the risk effectively. His approach has been explained in Turnbull Report on Risk Management and Internal Control.
Anthony Carey has presented the general model for financial risk management and it serves as a framework rather than the set of rules. According to him, it is very important to have the framework that provides the ability to make the sound judgment, identify the issues, understand the risk and challenge the cultures (Carey, 2001). He further adds that one of the greatest challenges of risk management is to make the sound judgment. If the judgment is not sound, then no force or no control mechanism can prevent the loss (Carey, 2001). Apart from this, it is also very important to identify the risk surrounding the business. The risk can be very specific surrounding the dishonest trader without proper controls to the general risk prevalent in the financial market (Carey, 2001). So, the company must be able to understand various natures of the risk and take appropriate measures to mitigate them. According to Carey (2001), “reputational risk is a major issue for the entire financial services sector, given the fundamental need for customers to believe in the stability and security of an organization’s operations if they are to continue trusting it to handle their affairs”. There is no need to justify this concept because when the business fails to maintain its reputation, then the business will lose its investors and the customers. The last concept discussed by Carey in his paper is the cultural challenge where he emphasizes the need for establishing the organizational culture that provides the supporting framework for the organization's existing risk management policy (Carey, 2001).
The two financial risk management experts present two different views of risk management. While Dr. Kallman provides the specific risk management techniques, Carey provides a general framework for financial risk retention based on his paper on the Turnbull Report. Even though these two approaches present by two experts differ from one another, both of them concludes that it is very important to manage the risk surrounding the business. While this paper presents the brief understanding about the importance of risk management, the paper was based on the articles published by Dr. Kallman and Carey.
References
Carey, A. (2001). Effective risk management in financial institutions: The Turnbull approach. Balance Sheet, 9(3), 24-27. Retrieved on June 24, 2013, from http://search.proquest.com/docview/204691420?accountid=32521
Ioan, M., & Bent, D. (2012). Risk Management in Collaborative Systems. Risk Management - Current Issues and Challenges. doi:10.5772/50844
Kallman, J. (2008). Financing risk retention. Risk Management, 55(9), 57-57, 4. Retrieved on June 24, 2013, from http://search.proquest.com/docview/227002053?accountid=32521
Till, H. (2012). The Heartlander Institute. The Collapse of MF Global: What Happened and Lessons Learned. Retrieved on June 23, 2012, from http://news.heartland.org/newspaper- article/2012/06/26/collapse-mf-global-what-happened-and-lessons-learned
