Risk Management
“Risk Management in Banks: The AHP way”
By: Diksha Arora
PG Candidate, Class of PGDM-2010
BIMTECH, India
Abstract
Risk is inherent in every walk of life. Banks are, by definition, in the business of taking and managing risk. The paper deals with the study of Risks associated with commercial banks like risk revolving on capital, credit risk, market risk, liquidity risk, earnings risk, business strategy risk, environmental risk, operational risk, group risk, internal control risk, organizational risk, management risk and compliance risk. In the global scenario, the degree to which the models have been incorporated into the Risk Management and economic capital allocation process varies greatly between banks. Through this paper an attempt was made to construct an optimal model using Analytical Hierarchy Programming to find the risk rating of a bank. This model will bring uniformity and help in assessing performance of a bank vis-a-vis another which also forms a part of RBI supervision.
Introduction
The etymology of the word "Risk" can be traced to the Latin word "Rescum" meaning Risk at Sea or that which cuts. Risk is inherent in every walk of life. Banks are, by definition, in the business of taking and managing risk. With growing competition and fast changes in the operating environment impacting the business potentials, banks are compelled to encounter various kinds of financial and non-financial risks. Risk is associated with uncertainty and reflected by way of charge on the fundamental/ basic i.e. in the case of business it is the Capital, which is the cushion that protects the liability holders of an institution.
The various risks that a bank is bound to confront is divided into two categories namely business risks and control risks. Business risk involves the risks arising out of the operations of the bank, the business it is into and the way it conducts its operations. It consists of 8 types of risks namely capital, credit, market, earnings,
By: Diksha Arora
PG Candidate, Class of PGDM-2010
BIMTECH, India
Abstract
Risk is inherent in every walk of life. Banks are, by definition, in the business of taking and managing risk. The paper deals with the study of Risks associated with commercial banks like risk revolving on capital, credit risk, market risk, liquidity risk, earnings risk, business strategy risk, environmental risk, operational risk, group risk, internal control risk, organizational risk, management risk and compliance risk. In the global scenario, the degree to which the models have been incorporated into the Risk Management and economic capital allocation process varies greatly between banks. Through this paper an attempt was made to construct an optimal model using Analytical Hierarchy Programming to find the risk rating of a bank. This model will bring uniformity and help in assessing performance of a bank vis-a-vis another which also forms a part of RBI supervision.
Introduction
The etymology of the word "Risk" can be traced to the Latin word "Rescum" meaning Risk at Sea or that which cuts. Risk is inherent in every walk of life. Banks are, by definition, in the business of taking and managing risk. With growing competition and fast changes in the operating environment impacting the business potentials, banks are compelled to encounter various kinds of financial and non-financial risks. Risk is associated with uncertainty and reflected by way of charge on the fundamental/ basic i.e. in the case of business it is the Capital, which is the cushion that protects the liability holders of an institution.
The various risks that a bank is bound to confront is divided into two categories namely business risks and control risks. Business risk involves the risks arising out of the operations of the bank, the business it is into and the way it conducts its operations. It consists of 8 types of risks namely capital, credit, market, earnings,
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