Devoloping Risk Management

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DEVELOPING RISK

MANAGEMENT

IN BANKS

BY

AZIZ UR RAHMAN

Presented by: Faisal Kamran

Date: March 2nd , 2009.


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WHY I CHOOSE THIS

TOPIC: Banks are profit earning institutions, they face

problems as well in borrowing and lending, when

banks are exposed to various risks in doingbusiness and failure to adequately manage these

risks exposes banks not only to losses, but may

also threaten their survival thereby endangering the

stability of the financial system. Hence , as an MBAstudent we should learn how to manage the

developed risks. The risks may include credit,

market, liquidity, and operational.


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THEME:

The main idea of this article is that the

presence of element of risk is always their in

any business so as the case of bank as well.What we need to do is how effectively and

efficiently minimize these in the best interest

of the business. A sound risk management

structure makes the banks to run smoothly

and in progress. Banks participates in

developing economy of every country


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SUMMARY

In the past 50 years Pakistans banking sector hasshown a tremendous growth and banking ofPakistan are going ahead in this respect. Andstrong as compared to other countries of theworld .In this article the author AZIZ UR RAHMAN

is sharing his views about the risks developingand the management of those risks in bankingnetwork. The key elements of risk managementprocess should include

1. Risk management structure with board and seniormanagement oversight as an integral element.

2. System and procedure for risk identification,measurement, monitoring and control.

3. Risk management framework review mechanism.


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RISK MANAGEMENT STRUCTURE:

A sound risk management structure is important to ensure that

the banks overall risk exposures are within the parameters set

by the board. Such structure should be in accordance with the

size of bank, complexity, and diversity of its activities.

2. The risk management structure should facilitate effective

board and senior management oversight and proper execution

of risk management and control processes.

At he minimum, the structure should contain the following:


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(( (a) BOARD AND SENIOR MANAGEMENT OVERSIGHT:

The board should be responsible for establishing the banks strategy and

significant policies relating to management of individual risk elements to which it isexposed. The board responsibilities should include:

Defining the banks overall strategic direction and tolerance level for each

element.

Ensuring that the bank maintains the various risks facing it at prudent levels.

Ensuring that senior management as well as individuals responsible for managing

individual risks facing the bank possesses sound expertise and knowledge to

accomplish the risk management function.

Ensuring that the bank implements sound fundamental principles that facilitate the

identification, measurement, monitoring and control of all risks facing it.

Ensuring that appropriate plans and procedures for managing individual risk

elements are in place.


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(b) BOARD RISK MANAGEMENTCOMMITTEE:

A Board Risk Management Committee

should be in place, which should be responsible for

ensuring adherence to the banks risk management policy

and procedure as set by the board



(c) SENIOR MANAGEMENT:

Senior management is responsible for the implementation of risk policies and

procedures keeping in view the strategic direction and risk appetite specified

by board.

Senior management is responsible for:

The development and implementation of procedures and practices that

translate the boards goals, objectives, and risk tolerances into operatingstandards that are well understood by bank personnel.

Establishing lines of authority and responsibility for managing individual

risk elements in line with the boards overall direction.

Risk identification, measurement, monitoring and control procedures

Establishing effective internal controls over each risk management process. Ensuring that the banks risk management processes are properly

documented.

And staffs are aware of risks.



RISK MANAGEMENT COMMITTEE

A risk management committee to be headed by aboard Member in charge of Risk Management should beresponsible for the review of the banks risk managementframework, identification of lapses and suggestion of

corrective measures. Through the examination of balancesheet structure, portfolio limits and distribution, target market/ products, using macro economic data, environmentassessment and in house statistics. The Committee should have reporting relationship tothe Board Risk Management Committee. Members of the

Committee should, at minimum, comprise the heads ofdepartment in risk management division, heads ofoperations department as well as heads of human resourcesand legal departments.



RISK MANAGEMENT DIVISION:

A risk management division headed by an

executive vice president, which should comprise therisk management and other relevant departments

should be established.



RISK MANAGEMENT DEPARTMENT :

A Risk Management Department withfunctional arrangements to ensure effective

management of credit, market, operational andliquidity risk. For each of the risks, thearrangements should cover the following areas,among others: Establishment of systems and proceduresrelating to risk identification, measurement and

control and monitoring of loan and investmentportfolio quality and early warning. Ensuring that risk remains within theboundaries established by the Board. Ensuring that the business line comply withrisk parameters and prudential limits established

by the Board. Remedial measures to address identifieddeficiencies and problems. Stress testing of credit portfolio, also inrelation to environmental deficiencies andproblems.

Risk reporting


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Conclusion:

The starting of this article was the observationthat banks are [ by their very nature ] in riskbusiness and that they conduct risk management

as an empirical fact ; the combination of thesefactors constitutes a positive theory for riskmanagement in banks. However the central roleof risk in banking business is merely a necessarycondition for the management of risks. We know

that value maximization is the ultimate goal ofbanks, documentation and adequate awarenessabout the risk in generality of staff is necessaryso as to make risk management a part ofcorporate culture of bank.

Devoloping Risk Management

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