EXECUTIVE SUMMARY

Banks for International Settlement (BIS) has defined Risk as - Risk is the threat that
an event or action will adversely affect an organizations ability to achieve its
objectives and successfully execute its strategies.
Risk management is a planned method of dealing with the potential loss or damage. It is an
ongoing process of risk appraisal through various methods and tools.
Bank is primarily exposed to credit risk, market risk, liquidity risk, operational risk and legal risk.
Credit risk is the risk of loss that may occur from the failure of any party to abide by the terms and
conditions of any financial contract with banks, principally the failure to make required payments on
loans due to the banks. Tools for managing credit risk are Exposure Ceilings, Review/Renewal, Risk
Rating Model, Risk based Scientific Pricing, Portfolio Management and Loan Review Mechanism..
Liquidity risk arises in the funding of lending, trading and investment activities and in the
management of trading positions. It includes both the risk of unexpected increases in the cost of
funding an asset portfolio at appropriate maturities and the risk of being unable to liquidate a position
in a timely manner at a reasonable price. The goal of liquidity management is to be able, even under
adverse conditions, to meet all liability repayments on time, to meet contingent liabilities, and fund all
investment opportunities.
Operational risk can result from a variety of factors, including failure to obtain proper internal
authorizations, improperly documented transactions, failure of operational and information security
procedures, computer systems, software or equipment, fraud, inadequate training and employee
errors. Operational risk is measured by Basic Indicator approach, Standardised Approach, and
Advance measurement Approaches.
Interest Rate Risk is the potential negative impact on the Net Interest Income and it refers to the
vulnerability of an institution's financial condition to the movement in interest rates.There are
different techniques such as a) the traditional Maturity Gap Analysis to measure the interest rate
sensitivity, b) Duration Gap Analysis to measure interest rate sensitivity of capital, c) simulation and
d) Value at Risk for measurement of interest rate risk.
"Basel III" is a comprehensive set of reform measures, developed by the Basel Committee on Banking
Supervision, to strengthen the regulation, supervision and risk management of the banking sector.
These measures aim to:
1) Improve the banking sector's ability to absorb shocks arising from financial and economic stress,
whatever the source
2) Improve risk management and governance
3) Strengthen banks' transparency and disclosures.
The reforms target:
1) bank-level, or microprudential, regulation, which will help raise the resilience of
individual banking institutions to periods of stress.
2) macroprudential, system wide risks that can build up across the banking sector as well as
the procyclical amplification of these risks over time.
Three Pillars of Basel III are:
1) Capital Requirements 2) Supervisory Review 3) market Discipline

CONCLUSIONS
The essence of risk management is not avoiding or eliminating risk but deciding which risks to
exploit, which ones to let pass through to investors and which ones to avoid or hedge. Risk
management prevents an organization from suffering unacceptable loss that can cause failure or can
materially damage its competitive position. Risk management should be a continuous and developing
process which runs throughout the organizations strategy and the implementation of that strategy. It
should address as many of the risks surrounding the organizations activities past, present and in
particular, future, as possible. It cannot be developed a one-size-fit-all risk management process for all
the organizations. In the case of a bank, functions of risk management should actually be bank
specific dictated by the size and quality of balance sheet, complexity of functions, technical/
professional manpower and the status of Management Information System in place in that bank.
Balancing risk and return is not an easy task as risk is subjective and not quantifiable, whereas return
is objective and measurable. The extent, to which a bank can take risk more consciously, can
anticipate the adverse changes and reacts accordingly, is a determinant of its competitive advantage,
as it can as it can offer its products at a better price than its competitors. Because of the fast-changing
nature of a banks trading book and the complexity of risk management, banks engaged in trading
must have market risk measurement and management systems that are conceptually sound and that
are implemented with high integrity. This reinforces the fact that risk management structures and
related strategies should be embedded in a banks culture and not be dependent on just one or two
people. Risk management must be integrated into the culture of the organization with an effective
policy and a program led by the senior management. It must translate the strategy into tactical and
operational objectives, assigning responsibility throughout the organization with each manager and
employee responsible for the management of risk as part of their job description. The Basel proposals
provide a good starting point that banks can use to start building processes and systems attuned to risk
management practice. So The study says:
1) Risk management underscores the fact that the survival of an organization depends heavily on
its capabilities to anticipate and prepare for the change rather than just waiting for the change
and react to it.
2) 2)The objective of risk management is not to prohibit or prevent risk taking activity, but to
ensure that the risks are consciously taken with full knowledge, clear purpose and
understanding so that it can be measured and mitigated.
3) Functions of risk management should actually be bank specific dictated by the size and
quality of balance sheet, complexity of functions, technical/ professional manpower and the
status of MIS in place in that bank.
4) Risk Management Committee, Credit Policy Committee, Asset Liability Committee, etc are
such committees that handle the risk management aspects.
5) The banks can take risk more consciously, anticipates adverse changes and hedges
accordingly; it becomes a source of competitive advantage, as it can offer its products at a
better price than its competitors.
6) Regarding use of risk management techniques, it is found that internal rating system and risk
adjusted rate of return on capital are important.
7) The effectiveness of risk measurement in banks depends on efficient Management
Information System, computerization and net working of the branch activities.

References

Business today Magazine

Business Standard
The economic Times
Reserve bank of India website
Basel III committee Reports
Risk Management in Banks by R.S. Raghavan
Wikipedia