Introduction
Banks have risks in the form of people risks, financial risks, and operational risks. The forms of risk are common in various banks. However, each of the risks is associated with certain challenges, which make it sensitive to the banking field. The occurrence of the risks may be avoided or mitigated through application of some level of professionalism. However, the process is likely to be highly involving as well as challenging. It would be wise to have the proper understanding of the different forms of risk and the definition of the procedure that would be followed in avoiding them.
People risk is one of the common risks in the banks. The people are assigned various responsibilities in the bank, and they are supposed to oversee different activities. However, the individuals are likely to behave in a way that is not in line with the bank activities. Failure to comply with the set rules and principles of the bank, risks are likely to come up (Carey & Stulz, 2006).
The managers form a critical part of people risk in banks. They authorize various activities in the bank, which may include withdrawal and transfer of money. At a point where they may abuse the authority bestowed on them to cause illegal withdrawals and misuse of funds, the individuals become risky to the operations of the bank. Also, the people risk in banks may be through the employees. They are usually responsible for the exchange of money in the banks. They are usually involved in the daily transactions of the banks (Hussain, 2000). Following the easy access to the money meant for trade in banks, they may engage in malpractices that may make them fraud the bank.
Financial risks
The other risks that are common in banks are financial risks. Although the most important place for keeping money is the bank, the financial risks are not avoidable. Slightest mistakes in the bank may cause a major problem to the finances of the bank (Hussain, 2000). Thus they need exclusive management.
One of the financial risks is usually incurred when paying a large number of clients. The clients deposit the money to the bank while the bank utilizes the money to offer loans to other clients. The client receives a lower interest rate than the rate which the bank receives from the borrower. The risk may come in when the clients withdraw all their money at the same time (Cherep & Korobov, 2015). At such a point, the bank may not withstand the demands thus becoming bankrupt.
The second risk is at the point of recovering from debtors. The situation becomes risky when the bank is unable to recover the loan amount with the interest from the debtors. If it gets to such a situation, the bank is unable to pay its creditors. On the other hand, the major source of income for a bank is the interest rate charged to the debtors. If the debtors fail to pay back to the bank, the institution will be forced to bear huge losses (Ghosh, 2012).
The other source of financial risks is an error by machines as well as the staff. The organizational functioning of a bank depends on the human effort as well as electronic resources. The two resources are prone to mistakes that are likely to cause failure of the entire bank system. Such errors may cause a loophole that would make the bank incur excessive losses (Carey & Stulz, 2006).
Operational risks
Further, there are operational risks, which may influence the performance of the banks. One of the elements of the operational risks is an improper internal process for the bank. There may not be coordination of the various processes or systems in a bank preventing them from extending high-quality services. Failure of one part of the system would mean a loss for the company. Also, the operational risks may be in the form of the legal systems that define the existence and the operations of the bank. The legal processes may be binding to the bank operations exposing the institutions to financial risks (Hussain, 2000). The risks may bring forth losses to the company since they may be unaffordable.
Mitigation of the risks
The people risks may be mitigated through hiring highly competent individuals with the right skills to handle finances and lead in making reliable financial decisions. The individuals should be tested on their ethics that would help them in making concrete decisions regarding the financial leadership that have been bestowed on them (Ghosh, 2012).
Also, the financial risks may be resolved by the employment of certain financial measures. Proper grilling of the debtors will be required through analysis of their debt records to avoid giving loans to people who are used to manipulation of bank systems by avoiding repaying their loans. Also, the loans should be given in balance to the amount of money available for withdrawal by clients. All the faults by machines should be fixed to avoid errors that are likely to cause losses (Cherep & Korobov, 2015).
The operational risks may be avoided through setting up a system that brings all the operations together through coordination of operations. The systems should be set in such a way that they can work together with minimal errors. All the legal requirements should be satisfied through following up the necessary plans on time (Carey & Stulz, 2006).
References
Carey, M., & Stulz, R. (2006). The risks of financial institutions. Chicago: University of Chicago Press.
Cherep, A., & Korobov, A. (2015). IMPROVE THE MECHANISM OF CURRENCY RISKS OF COMMERCIAL BANKS. Financial And Credit Activity: Problems Of Theory And Practice, 1(18), 3.
Ghosh, A. (2012). Managing risks in commercial and retail banking. Singapore: John Wiley & Sons (Asia).
Hussain, A. (2000). Managing operational risk in financial markets. Oxford: Butterworth-Heinemann.
