Banks need to be cautious on risks
The banking industry will invariably follow economic trends which is why there’s an acute need for local banks to be cautious on how much capital they have got and what risks they can absorb, according to an internationally renowned risk consultant.
“The acceptance and management of financial risk is inherent to the business of banking and banks’ roles as financial intermediaries. A bank’s ability to measure, monitor and steer risks comprehensively is becoming a decisive parameter for its strategic positioning,” David Roden, CEO and Principal of Independent Global Research Ltd, a specialist research firm serving over 50 of the world’s largest special situation hedge funds from its London head office, told the Business Times. He said this on the sidelines of a symposium on Risk Management Best Practices for Emerging Markets Financial Institutions organised by Capital Alliance Ltd (CAL) in Colombo.
He said that the risk management framework and complexity of the process, and internal controls used to manage risks, depends on the nature, size and complexity of institutions’ activities, noting that risk He added that the formulation of policies relating to risk management only would not solve the purpose unless these are clear and communicated down the line. “Senior management has to ensure that these policies are embedded in the culture of any organization. Risk tolerances relating to quantifiable risks are generally communicated as limits or sub-limits to those who accept risks on behalf of organization,” he said, noting that not all risks are quantifiable. management as commonly perceived does not imply minimizing risk; rather the goal of risk management is to optimize risk-reward trade -off.
He added that the formulation of policies relating to risk management only would not solve the purpose unless these are clear and communicated down the line. “Senior management has to ensure that these policies are embedded in the culture of any organization. Risk tolerances relating to quantifiable risks are generally communicated as limits or sub-limits to those who accept risks on behalf of organization,” he said, noting that not all risks are quantifiable. He also said that qualitative risk measures could be communicated as guidelines and inferred from management business decisions.
CAL in a press release said that risk management is both an art and a science. “The financial crisis of 2008-09 showed that even the world’s largest and most sophisticated financial institutions incompletely understood the various market, credit and operational risk factors they faced. The result was a global recession and the near collapse of the US banking system. Clearly the stakes are high, and to that end the Central Bank of Sri Lanka has issued a comprehensive set of guidelines governing risk management in the domestic market environment,” the release said, adding that implementation of these mandatory changes is proving to be difficult, expensive and time consuming.
Financial institutions with a robust risk management practice are better equipped to navigate volatile markets and capitalize on opportunities that arise during uncertain times, it added.