Risk in Banks – An overview
According to scientists, universe emerged from a high-risk event popularly known as Bing Bang Theory. Probably for that reason, each activity in nature too is embedded with risk. But, over a period of time, plants and animals including human being developed the skill of identifying risks and adjusting themselves to mitigate the risk. Big trees adjusting themselves according to the direction of winds, hen gathering her broods under her wings seeing hunter birds, farmers sowing seeds adjusting with the weather and a kid moving away from burning candle are all examples of nature and human beings following the risk management practices of identifying, assessing, controlling and responding to risk.
Banking deals with money and for that reason each activity undertaken by a banker carries risk. Each activity carried by a bank employee, irrespective of cadre, inside a branch is a decision making with associated risk and hence takes risk control measures too by intuition. Many risk control measures have over a period, got imbibed in daily routine are getting executed without any conscious effort. Counting the number of currency notes to ensure correctness of amount received, verifying the signature in a cheque to ensure the authenticity before parting with the money, joint custody of valuables, maintaining secrecy of passwords and switching on of alarm siren are all part of risk control measures followed by a banker. Yet, the words risk, controls and Basel still remain freighting words even for bankers. No doubt that specialization in the field requires thorough understanding of the principles and statistics.
Banking related risks have increased tremendously in recent times, as customer demands for comfort and conveniences rose exponentially. Evolving financial markets and products, multiple channels of delivery and digital banking have exposed banks to a variety of risks including cyber attacks, compelling all banks to adopt latest technology and techniques to control the associated risks. Central Banks world over have been following the norms prescribed by Basel committee in controlling risks. Three major risks that have been identified are credit, market and operational risks.
Recent trends show that a severe cyber-attack and frauds by employees are reaching alarming levels to the extent of questioning the very existence of any bank. An attack on Bangladesh Central Bank led to a loss of USD 81 Million. The attackers exploited the deficiencies in the SWIFT network. In India, few employees in a branch of the Punjab National Bank, second largest nationalised bank perpetuated a fraud of more than Rs. 13,000 Cr.
Risk definition and mitigation measures
According to definitions, risk is a variation from expectation. Risk management deals with events that can be identified and measured and the losses of which can be statistically measured. Therefore uncertainties not come under the definition and such happenings have to be handled as and when occur. Since risk is measurable and quantifiable, it provides an opportunity to management to take a judicious decision on as to whether undertake the business based on risk reward measurement.
The options available for a bank to manage risk are a. avoidance, by deciding not to enter the particular line of business, b. reduction, as in the case of obtaining collateral to fall upon, c. sharing , as in the case of obtaining insurance and d. optimization, by entrusting performance of duties to those who have more expertise as in the case of outsourcing and d. retention, deciding to bear the loss if risk materialize. Basel norms are the governing principles for Banks to contain risk in businnes.
