What the Process of Risk Management Looks Like in the Financial Sector

By Don Q. Dao - Published on July 16, 2018
Process of Risk Management in Financial Sector

Managing risk in the financial sector is essential to companies to not take any losses.

The finance industry is filled with risks, both small and large. How those risks are managed could be the difference between proactivity and failure.

There is a lot of risk within the financial sector today. Financial organizations regularly face different types of risk throughout their operations. Risk tends to come from the uncertainty of financial loss and can hypothetically harm a company if it isn’t managed correctly and effectively.

In order to manage risk in a timely manner, you will need the mechanisms to manage risk created and the objective of preventing as much negative effects risk can have as possible, meaning that you’ll need to identify the potential risks in advance, analyze them and take the needed steps to diminish or eliminate them completely. Here are some of the different types of risk that you can find in the financial sector:

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Market Risk

Financial organizations are constantly at the risk of facing the possibility of loss due to the constant changes of market variables, including interest rate and exchange rate fluctuations. These variables can have a very negative impact on the financial capital of any company. With market risk management, you can develop a comprehensive and dynamic framework for monitoring, measuring and managing different financial aspects such as liquidity, interest rates and commodity price rates. Market risk management is essential for any company looking to prevent any losses.

Credit Risk

Credit risk is essential the potential that an establishment that has borrowed money will fail to pay the credit owed. This can occur due to various reasons including the inability or unwillingness to honor their part of the deal in relation to the transaction. To manage credit risk, many financial entities strive to maintain credit exposure within the acceptable parameters. One of the ways that they can effectively accomplish this is through a risk rating model that measures how much a bank can potentially lose on a credit portfolio.

Regulatory Risk

Due to the fact that the United States has plenty of financial regulations implemented on the federal and state level, all financial institutions face regulatory risk. Regulations are present because it gives the government more governing power and protects the public against losses. Many financial entities are held accountable due to the regulations present. However, these regulations can inhibit the growth of a business, thus hurting the growth of the economy as a whole. To manage regulatory risk, many establishments should perform their business activities within the regulations standards.

The Future of Risk Management

In today’s digital age, technology is constantly improving the way our society operates, especially within risk management. This can improve many new risk-management techniques and strategies that can help us make better risk decisions at a more efficient rate. With new tools such as big data, risk management can potentially see a lot of improvement in the following years.

With the advanced developments we’ve seen in the world of computers, it is now easier for us to take a look at a large amount of data to fully understand the bigger picture. We can now leverage structured and unstructured customer information to help make better credit risk decisions and monitor portfolios more closely. We can now also leverage big data to detect financial crime and predict the market trends and risks.

Risk management is very essential in our world today. After the big financial crash in the late 2000s, it has become more important for us to monitor the risks that we are taking.

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Don Q. Dao | Always striving to learn, Don Dao is driven by new adventures and challenges. His love for media and social interactions has led him to pursue a career in marketing. Over the years, he has developed a broad skill set in all aspects of marketing, specifically in event organization, social media marketing, and content marketing. He enjoys working with passionate people to bring visions to life and inspire the world.

Don Q. Dao | Always striving to learn, Don Dao is driven by new adventures and challenges. His love for media and social interactions has led him to pursue a ca...

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