Financial Institution Risk Management

Financial institution risk management is essential for the growth of both public and private financial organizations. With the growing competition in the financial market, the task of risk management is becoming increasingly important over the passage of time. Financial organizations face different types of operational risks. Business risks may arise due to several reasons like production loss, theft, fire, natural calamities like flood and earthquake. Reputational risk is another major threat faced by all popular financial service providers. Risk Management Policies of Financial Institutions All financial institutions make use of risk management strategies to take early precaution against unanticipated loss. Some of the widely used strategies of risk management are as follows:

• Transfer of risk is always a better option than risk absorption for all financial institutions regardless of size.
• It is always advisable to eliminate risk-bearing assets. Financial organizations always try to use less risky resources and other means of production.
• There are some risks that are naturally associated with the activity of the financial organizations. Elimination of those inherent risks is a real challenge for all financial institutions.

Risks are associated with different stages of business activity. Market creation, intermediation, servicing, packaging, distribution and origination are the various services, which may involve risks.

Financial institution risks can be broadly categorized into five different types.

The commonly found varieties of business risk include the following:

• Legal
• Systematic
• Counterparty