Bank risk management – The main problem of the monetary economy
| Author | Alexandru Olteanu |
| Pages | 275-283 |
Alexandru Olteanu. Professor, Ph.D., Nicolae Titulescu” University, Bucharest; (e-mail: aolteanu @univnt.ro)
Madalina Antoaneta Radoi (Olteanu). Lecturer, Ph.D., Nicolae Titulescu” University, Bucharest
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Risk may have an impact on financial and banking institutions, both an induced impact caused by the effects on the client, staff, shareholders, partners, and even on the central bank authority, and an impact taking the form of some losses directly incurred. Risk represents the possibility of producing an event with adverse consequences for the banking institution.
The exposure to risk is the present value of all losses and additional expenses/costs that are stood by the bank. In order to reduce the effects of the risks, within this paper, there are analyzed some aspects of their effective management, so that the boards of the banks have methods and techniques for analyzing and minimizing them.
The banking sector clearly evolves towards a higher level of techniques and approaches to risk management, in comparison to those used in the past. However, there is plenty of room for improvement. The techniques used by smaller banking institutions are less complex and efficient, in some cases, being necessary the need for improvement in order to make them able to reach the level of top banks. In their turn, these banks must be in a constant search for solutions and ways of managing the issues arising in the field of bank risks.
Today there is an increased concern in financial innovation within the banking activity, especially in terms of extra-balance instruments, which could affect the entire banking system.
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In a bank, the new banking environment and the increased market solvency have required an integrated approach to management techniques, assets and liabilities and bank risk management (see Figure 1).
[SEE THE FIGURE IN THE ATTACHED PDF]
Fig. 1. Exposure to the risk of a bank.
Operational risk is essential for the effective management and control of all risk categories. It is important for the definition of this kind of risk to take into account the entire variety of operational risks and to capture significant cases resulting in major operational losses.
As a result, there have been identified operational risk events that have the potential to cause serious losses, including the following:
| The event which generates risk | Includes |
| Internal Fraud | Wrong International Reports, staff theft, illegal transactions in the employee's own account |
| External Fraud | Theft, forgery and damage caused by hackers |
| Human resources risk | Claims of the staff, violation of employees’ health and safety rules, claims related to discrimination attitudes. |
| Risk of products and services | Breaches of trust in the bank, the inappropriate use of confidential information, illegal transactions in the bank account, money laundering, the sale of unauthorized products |
| Risk of assets/property and personnel | Terrorism, vandalism, earthquakes, fires, floods |
| Technological risk | Hardware and software errors, telecommunications problems, lack of supplies |
| Management risk | Errors in data entry, errors in the management of the collateral, incomplete legal documentation, unauthorized access to customer accounts, the negative performance of the counterparty |
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For practical use and theoretical clarity it is important to distinguish the operational risk from other types of risks.
It is important to understand risk as being the cause of negative deviation from an expected or desired end, or if we see risk as being the negative effect. Sometimes it is used a combination of cause and effect to identify and demarcate the risk.
Therefore, it is considered that the identification and demarcation of operational risk as opposed to credit risk and market risk, is essential.
The Risk identification matrix is reproduced in Fig. 2. 2.
| Direct Manifestation | ||||||
| Losses due to the value of the counterparty | Losses Caused by the change of market value | Other losses | Optional loss | Indicated manifestation | ||
| Increase of expenses | Decrease of revenues | |||||
| Uncertain/wrong Information about the counterparty | A / B / a | B | B | B | B | B |
| Uncertain/wrong Information about the market | A | |||||
| Other causes | A | |||||
| Inappropriate or wrong processes, persons, systems, external events. | I / a | II | III | IV | V | |
Figure 2. Risk Identification Matrix (RIM)
The above Cause / effect matrix, known as “Risk identification matrix” - RIM is...
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