DEVELOPING RISK

MANAGEMENT
IN BANKS
BY
AZIZ UR RAHMAN
 
Presented by: Faisal Kamran
Date: March 2nd , 2009.
  
 

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 WHY I CHOOSE THIS
TOPIC:
• Banks are profit earning institutions, they face
problems as well in borrowing and lending, when
banks are exposed to various risks in doing
business and failure to adequately manage these
risks exposes banks not only to losses, but may
also threaten their survival thereby endangering the
stability of the financial system. Hence , as an MBA
student we should learn how to manage the
developed risks. The risks may include credit,
market, liquidity, and operational.
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 THEME:

• The main idea of this article is that the

presence of element of risk is always their in
any business so as the case of bank as well.
What we need to do is how effectively and
efficiently minimize these in the best interest
of the business. A sound risk management
structure makes the banks to run smoothly
and in progress. Banks participates in
developing economy of every country
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 SUMMARY
In the past 50 years Pakistan’s banking sector has
shown a tremendous growth and banking of
Pakistan are going ahead in this respect. And
strong as compared to other countries of the
world .In this article the author AZIZ UR RAHMAN
is sharing his views about the risks developing
and the management of those risks in banking
network. The key elements of risk management
process should include
1. Risk management structure with board and senior
management oversight as an integral element.
2. System and procedure for risk identification,
measurement, monitoring and control.
3. Risk management framework review mechanism.

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 RISK MANAGEMENT STRUCTURE:

 A sound risk management structure is important to ensure that

the bank’s overall risk exposures are within the parameters set
by the board. Such structure should be in accordance with the
size of bank, complexity, and diversity of its activities.
 2. The risk management structure should facilitate effective
board and senior management oversight and proper execution
of risk management and control processes.
 At he minimum, the structure should contain the following:

1
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(( (a) BOARD AND SENIOR MANAGEMENT OVERSIGHT:

The board should be responsible for establishing the bank’s strategy and 
significant policies relating to management of individual risk elements to which it is 
exposed. The board responsibilities should include:
 Defining the bank’s overall strategic direction and tolerance level for each 
element.
 Ensuring that the bank maintains the various risks facing it at prudent levels.
 Ensuring that senior management as well as individuals responsible for managing 
individual risks facing the bank possesses sound expertise and knowledge to 
accomplish the risk management function.
 Ensuring that the bank implements sound fundamental principles that facilitate the 
identification, measurement, monitoring and control of all risks facing it.
 Ensuring that appropriate plans and procedures for managing individual risk 
elements are in place.

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 (b) BOARD RISK MANAGEMENT 
COMMITTEE:
A Board Risk Management Committee 
should be in place, which should be responsible for 
ensuring adherence to the bank’s risk management policy 
and procedure as set by the board

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 (c) SENIOR MANAGEMENT:

Senior management is responsible for the implementation of risk policies and 
procedures keeping in view the strategic direction and risk appetite specified
by board.
Senior management is responsible for:
 The development and implementation of procedures and practices that
translate the board’s goals, objectives, and risk tolerances into operating 
standards that are well understood by bank personnel.
 Establishing lines of authority and responsibility for managing individual
risk elements in line with the board’s overall direction.
 Risk identification, measurement, monitoring and control procedures
 Establishing effective internal controls over each risk management process.
 Ensuring that the bank’s risk management processes are properly 
documented.
And staffs are aware of risks.

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 RISK MANAGEMENT COMMITTEE

 A risk management committee to be headed by a

board Member in charge of Risk Management should be
responsible for the review of the bank’s risk management
framework, identification of lapses and suggestion of
corrective measures. Through the examination of balance
sheet structure, portfolio limits and distribution, target market
/ products, using macro economic data, environment
assessment and in house statistics.
 The Committee should have reporting relationship to
the Board Risk Management Committee. Members of the
Committee should, at minimum, comprise the heads of
department in risk management division, heads of
operations department as well as heads of human resources
and legal departments.

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 RISK MANAGEMENT DIVISION:

 A risk management division headed by an

executive vice president, which should comprise the
risk management and other relevant departments
should be established.

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RISK MANAGEMENT DEPARTMENT
• :

A Risk Management Department with

functional arrangements to ensure effective
management of credit, market, operational and
liquidity risk. For each of the risks, the
arrangements should cover the following areas,
among others:
 Establishment of systems and procedures
relating to risk identification, measurement and
control and monitoring of loan and investment
portfolio quality and early warning.
 Ensuring that risk remains within the
boundaries established by the Board.
 Ensuring that the business line comply with
risk parameters and prudential limits established
by the Board.
 Remedial measures to address identified
deficiencies and problems.
 Stress testing of credit portfolio, also in
relation to environmental deficiencies and
problems.
Risk reporting
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 Conclusion:

 The starting of this article was the observation

that banks are [ by their very nature ] in risk
business and that they conduct risk management
as an empirical fact ; the combination of these
factors constitutes a positive theory for risk
management in banks. However the central role
of risk in banking business is merely a necessary
condition for the management of risks. We know
that value maximization is the ultimate goal of
banks, documentation and adequate awareness
about the risk in generality of staff is necessary
so as to make risk management a part of
corporate culture of bank.
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