The biggest risk is not taking any risk... In a world that changing really quickly, the only strategy that is guaranteed to fail is not taking risks. - Mark Zuckerberg
The only thing that is permanent in this world is change. And with every change very humbly follows the uninvited friend risk. Risk could be of anything, of existence, survival, competition, loss of reputation, or anything which could bring fear in one’s mind. But the most satisfying factor is that the nature’s rule is same for all, no distinction between living and non-living entities. Atleast in nature’s eyes there are equal. It imposes adverse situations and tests forbearance.
One may argue also, why take risk; lets live a risk free life. Well that’s utopian state and does not exist in reality. Risk is an integral part of ones’ life be it an individual or any organisation. No greatness has ever been achieved without enduring hardships. No organisation has ever been great in this world without facing difficult times.
What is risk? Risk is nothing but the possibility of losing something of value. An organisation needs to earn profits to survive in the market and to earn profits they have to take risks. Hence, risks cannot be avoided but yes, they can be mitigated. Success cannot last unless one learns how to mitigate the risks. Organisations need to decide an appropriate trade-off between risk and returns. Inability to cope with risk has resulted in collapsing of giants like Lehmann Brothers, DSP Merrill Lynch etc. to name a few.
Let’s have a look on generally what kinds of risks are faced by the banks. We all know that banks are the pillars of any financial system. Without them today we cannot imagine the financial eco-system. The more robust banks, the better financial system would be. And banks are in the business of taking risk. The key risk that any Bank is exposed to includes credit, market, liquidity, operational (including information security), legal, compliance and reputation risks.
? Credit Risk: Credit risk entails the risk of loss that may occur from any party’s failure to abide by the terms and conditions of any financial contract, principally the failure to make required payments to the bank. Credit risk can be mitigated through detailed evaluation of the technical, commercial, financial, marketing and management factors and the sponsor’s financial strength and experience.
? Market Risk: Market risk arises when movements in market factors (foreign exchange rates, interest rates, credit spreads and equity prices) impact the bank’s income or the market value of its portfolios. Market risk on the trading portfolio can be managed through measures such as net overnight open position limits, price value of one basis point, value-at-risk and stop loss limits. The risks associated with non-trading portfolios can be measured through metrics such as the duration of equity, earnings at risk and liquidity gap limits.
? Operational risk: Operational risk is the risk of loss resulting from inadequate or failed internal processes, people or systems, or from external events. Operational risk includes legal risk but excludes strategic and reputational risks. Operational risk is inherent in the bank’s business activities and spans a wide spectrum of issues. Operational risk can result from a variety of factors, including but not limited to failure to obtain proper internal authorisations, improperly documented transactions, failure of operational and information security procedures, computer systems, software or equipment, fraud, inadequate training and errors committed by employees. The bank’s operational risk can be managed through a comprehensive system of internal controls, systems and procedures to monitor transactions, key back-up procedures and undertaking regular contingency planning.
? Information technology risk: The cyber security threat landscape for banks and financial institutions is constantly evolving and threats such as phishing campaigns, distributed denial of service attacks, malware, ransom ware and exploitation of ATM vulnerabilities or vulnerabilities in systems provided to banks by software vendors are prevalent. The first line of defence is the technology and business/operations groups whose responsibility is to identify, assess, control and mitigate risks and ensure implementation of applicable policies and guidelines.
If a bank wishes, then also they cannot completely eliminate the risk since it is something which is very inherent nature of business. But yes, the impact can be reduced to a certain extent. We cannot stop the sea waves from crossing the shore but that should not be a deterrent to enjoy the nature’s beauty. Similarly defining our tolerance level and thereby adding some mitigants one can create a risk-return trade off.
Everyone starts from the same platform, but the important part is success will not come to those who remain on the harbour but rather to those who have the courage to embark on a journey to reach the next destination.However, the legends are those who do not sit on the deck but have the courage to swim across the ocean and that too in difficult circumstances.
Always remember that tough times never last, but tough people do, and organisations are nothing but group of people coming together for a common cause.
A ship in harbor is safe — but that is not what ships are built for.” — John A.