Risk Management in Banks

If a bank takes more risk it can expect to make more money, but the greater risk also increases the NPAs (Non Performing Assets) and looses its business badly which can force it to go out from business. There should be following two objective before the banks-

Ø To generate profit

Ø To stay in business

The function of risk management in banks is –

Ø To ensure that the total risk being taken is matched to the bank’s capacity for absorbing losses in case things go wrong.

Ø To help the CEO (Chief Executive Officer) direct the scare resources of capital to the opportunities that are expected to create the maximum return with the minimum risk.

Risk Management at Macro level: Like other banking functions risk, is also looked after by board of directors of the banks. The board has to maintain the balance between shareholder’s & debt-holder’s desires of taking risk. Apart from this it has to take in to account perception of rating agencies, regulators and its own desire to stay in business.

The board can oversee the three key functions of risk management.

Ø Determining the target debt rating.

Ø Determining the amount of available capital

Ø Allocating risk limits to each business unit/ segment with in the bank.