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Need for monitoring and risk management
in the financial sector
There are several reasons behind the
emphasis laid on the management of risk
in the financial industry these days.
Some of the reasons are listed as
follows –
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In the current joint stock firms
have a structure where the owners of
the firms are not managers. Hence,
this leads to n increase in the
occurrence of risk. Hence, there is
a requirement for proper tools in
order to achieve desirable results
by risk coverage.
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The financial industry no longer
follows the simple lending and
deposit function.
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Emerging markets.
-
Increase in the total number of
transactions that takes place across
borders which has risks associated
with it.
-
Terrorism remittances.
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The complex operations that take
place in financial transactions.
Monitoring risks associated with the
financial industry is an inevitable as
well as crucial part of managing risk.
The importance of monitoring risk in the
financial industry is of great important
due to reasons listed as follows –
-
Financial sector is a riskier sector
when compared to manufacturing and
trading.
-
This sector deals with other
people’s money.
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The deposit holder has a direct
stake.
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Due to the recent problems faced by
financial institutions such as banks
such as stuck portfolio which comes
under credit risk.
-
Due to Barings Bank’s bankruptcy due
to long position / short selling
which comes under market risk.
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Though operational risk has no
immediate impact, it is important
for progress and continuity of the
organisation.
Components of the framework for risk
management – The framework for risk
management has 5 components. The first
component of risk management is risk
identification. After identifying the
risk, it is then assessed, after which
seek management and solution. Quick
response followed by the implementation
of the solution and the final component
is monitoring the process of risk
management. It is important to learn
from experience so that it does not
occur again. For the efficient running
of the risk management process, it is
necessary that the entire process is
well communicated. The ISO or
International Organisation for
Standardisation defines risk management
as risk identification, risk analysis,
risk evaluation, risk control or risk
treatment, risk monitoring, risk review
and finally risk communication. These
mentioned activities can either be
followed systematically of in an ad-hoc
manner. The general rule is that by
applying these activities
systematically, it will result it
enhanced decision-making which in turn
will lead to improved outcomes.
Depending on the operations and
structure of an organisation, risk
management in the financial sector can
be applied in various ways. The
structure of risk management defines the
various organisational levels which
could be affected by risk and need to be
managed after identification. When risk
is monitored, one can take control of
the prevailing situation and see that
this risk will not affect the functional
aspects of the organisation. Hence, with
risk management and monitoring of risk,
the adverse affects of risk, whenever it
occurs, can be kept under control.
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