The Step of the Risk Management Process
The risk management process is comprised of five core steps. The first is the identification of risks. At the heart of this phase is to identify what is likely to hinder the ability to meet the targeted goals. After the risk has been identified, the next step is to analyze it. This stage requires one to determine the probability and the consequences of the identified risk(s). It assists a person or a group to understand the inherent nature of the risk along with the potential effects on the set goals. The third step is the risk ranking or evaluation. Here, risks are assessed and prioritized based on their magnitude (Crouhy, Galai & Mark, 2014). Primarily, the magnitude is a combination of the likelihood and consequences. In this phase, the likelihood of the identified risk(s) occurring and their severity in case they occur is determined. The risks with a high magnitude are usually subject to prioritization.
The fourth phase involves the treatment of risks. Here, the highest ranked or the prioritized risks are assessed. A plan to modify or treat these uncertainties in an attempt to achieve acceptable risk levels is set out. This stage requires the risk manager to determine how he or she can minimize the chances of the risks, including coming up with contingency plans (Crouhy, Galai & Mark, 2014). The ultimate step is monitoring and reviewing the risk. In this step, according to Pritchard and PMP (2014), communication and consultation is the key. The stage serves to ensure that the information that the entire risk management process is captured used, and maintained. It helps to uncover areas needing modifications and improvements.
Recently, my friend told me about how they assessed risks posed by the slippery floor at their workplace. They identified that the floor was likely to increase the number of falls. It was also revealed that the falls were indeed a great concern given that they could potentially cause both minor and fatal injuries. It was thus decided that the material used to make the floor would be replaced with a relatively rough one. According to the friend, the company is currently in the process of tracking the number of falls to determine whether the situation has changed.
Types of Risks in Banking
Credit risk is one of the critical risks in banking. This refers to the likelihood of a bank borrower failing to meet his or her obligations based on the terms agreed with the lending institution. The failure to pay the principal plus interest or the inability of the borrower to repay the dues in time is also considered as a credit risk (Crouhy, Galai & Mark, 2014). To illustrate credit risk better, I will give an example of my friend’s father Mr. X. Two years ago, Mr. X took a loan from a bank in New York. For the first three months, he met his obligations on time. However, on the fourth month, he was dismissed from his job. He paid the installments to the bank for the next three months. However, he began skipping the payments and by the 13th month, he had stopped repaying the loan completely.
Market risk is also a form of banking uncertainties. It defines the risk of losses, both on or off-balance sheet positions, that usually arise owing to market price movements (Crouhy, Galai & Mark, 2014). Market risks are comprised of four core components, and these include interest rate risk, foreign exchange risk, equity risk, as well as, commodity risk (Crouhy, Galai & Mark, 2014). Interest risks represent the likelihood of loss as a result of movements in the rate of interest. Equity risk, on its part, refers to an adverse shift in the price of stock. Foreign exchange risk is the potential of loss founded on a change in the value of the lending facility’s assets or liabilities. This change is facilitated by fluctuations in the exchange rate. The commodity risk is the likelihood of loss, which comes as a result of a negative shift in the price of commodities.
A third banking risk is called operational risk. This is the loss uncertainty that arises from failed or inadequate internal processes, incompetent people, and inappropriate systems (Crouhy, Galai & Mark, 2014). External events can also pose operational risks. Any of these can cause a hindrance to the ability of a bank to deliver its services thus denying it the chance to earn revenues. Such an outcome can have a drastic effect on the profitability of the bank. On 10th May 2016, the City National Bank was robbed by three armed gangsters (Patterson, 2016). Even though the robbery took a short time, the bank’s operations were brought to a standstill. According to Hoffman (2002), even the slightest business interruption can contribute towards the capability of an enterprise to achieve its goals. In the light of this claim, it is right to attest that, due to the operational risk presented by the robbery, the City National Bank’s performance for that particular day was not met.
References
Crouhy, M., Galai, D. & Mark, R. (2014). The Essentials of Risk Management. New York, NY: McGraw-Hill Education.
Hoffman, D. G. (2002). Managing operational risk: 20 firmwide best practice strategies. London, UK: John Wiley & Sons.
Patterson, F. (2016). LPD: New Details on Bank Robbery and Arrest. ABC 36. Retrieved from www.wtvq.com/2016/05/18/lpd-new-details-on-bank-robbery-and-arrest/
Pritchard, C. L., & PMP, P. R. (2014). Risk management: concepts and guidance. New York, NY: CRC Press.
