| The characteristics of present banking system is | | | | vis-à-vis the economic risk. We shall discus Basel I |
| exposed to diverse market and non-market risks, | | | | and Basel II in a little more detail in the articles to |
| which has put risk management in these sectors to a | | | | follow. |
| core functionary within the financial institutions. This | | | | The basic concept of risk management involves |
| has been essentially done to protect not only the | | | | making an assessment of the risk and then |
| interests of the stakeholders, but more obviously, in | | | | developing a strategy to manage that risk. Risks |
| protection to the shareholders and creditors. The | | | | ensuing out of physical or legal causes, such as, |
| growing economy demands a safe and sound banking | | | | natural disasters or fires, accidents, death, and |
| system, and as such, risk management has become a | | | | lawsuits, are one of those which are traditionally |
| critical task for the banking sectors, bringing in | | | | focused. But, in banking sectors, the focus is mainly |
| stability in the financial markets. A good supervision | | | | on risk factors involved with traded financial |
| of all the factors involved, would lead to identifying, | | | | instruments. In an ideal situation, the risks concerned |
| assessing, and promoting a secured risk management | | | | with substantial losses and the high probability of its |
| system. | | | | occurrence, are handled first, and given the highest |
| The banking sector is increasingly faced with tougher | | | | priority in risk management. The lesser probable ones |
| challenges in meeting various risk management | | | | comes next. In doing so, it is quite difficult to maintain |
| requirements, and no matter how tough it is, the | | | | the balance between the combination of different |
| present day operations requires the risk managers to | | | | scenarios, viz., risks with a high probability of |
| be vigilant, and unusually diligently perceptive towards | | | | occurrence but lower loss vs. a risk with high loss but |
| the causes of protecting the interest of the people | | | | lower probability of occurrence. |
| concerned. In the practical scenario, risk management | | | | In meeting the basic characteristics in banking |
| is very much fragmented, spread across in pockets, | | | | sectors, there is a need to provide human and |
| resulting in inconsistency in reporting, inadequate | | | | financial resources through-out the organisation, |
| measurements, and poor quality of management. | | | | enough to meet the purpose of an effective |
| Poor data availability is one of the major causes in | | | | compliance risk management system. In proving such |
| inefficient risk management, making it difficult for the | | | | resources, it is necessary to delegate proper |
| bank to manage and control in an institution-wide | | | | authority and independence in the working method. |
| environment. | | | | There needs to be a sense of 'ownership' in the |
| In order that a consolidated step could be taken | | | | compliance function, in order that the organisation can |
| towards a better risk management, there has been | | | | keep itself focused on its compliance risk |
| much interaction between the public and private | | | | management responsibility. A comprehensive |
| sectors, with an attempt to evolve techniques, | | | | database should be in place, along with monitoring |
| mostly pertinent to the banking sector, which | | | | and measuring of the risks involved in any kind of |
| represents the largest and most internationally active | | | | circumstances, which, in combination, may provide |
| industry in the world. Through these deliberations, | | | | meaningful reports based on the laws and regulations |
| Basel Committee (BCBS) in Basel, Switzerland, in | | | | governing compliance risks, associated with existing |
| 1988, came out with Basel I framework proposal, | | | | or new products, and new business activities. |
| which brought together closer ties between the | | | | The banking sector need to understand operational |
| banks' capital holding, and the risks that are involved. | | | | risk exposure at the organisational level, where the |
| This brought in higher capital level. The banking sector | | | | concerned risk factors are consolidated into one, |
| is growing rapidly, and with its large and complex | | | | making it somewhat easier to have a verification of |
| operations, Basel I have become inadequate in | | | | operational risk involved. We shall examine in the |
| continuing with the improvement of the advanced | | | | consequent articles the problems that banking sector |
| method of risk management that the banking sectors | | | | finds most difficult to address, which are deficient in |
| have today. A more comprehensive guideline was | | | | the current methodology used. There are gaps in |
| evolved in Basel II. This regulation envisaged that, the | | | | analysis of risk elements in the current procedures |
| banking sector should ensure a proper handling of the | | | | adapted, in establishing risk management and risk |
| capital, separate the operational risk from the credit | | | | control.prabirsenuk@yahoo.co. |
| risk while quantifying both, and distribute capital | | | | |