Hence the firms in the financial services industry attach more importance to the risk management in their organizations. Risk management in the financial services organizations is necessitated due to various reasons. The most important reason is the potential economic losses to which the firms will be exposed in case they had to meet with some unforeseen risk and it may erode the entire capital of the firm. There are other reasons for undertaking risk management in these firms like the tax implications of the transactions, movement in the capital and stock markets and the persistent fear of the people managing the financial services businesses that their decisions may be proved wrong by the course of business events. In any risk being faced by the financial service firm there is the potential danger of the firm losing profits which in turn would result in the decline of the firm value for some of the stakeholders. Similarly all or any of these reasons for managing the risk may force the management of the firm to make an assessment of the risks involved and take necessary corrective or preventive action to protect the firm against the risks identified. In this article the different kinds of risks to which the financial institutions are exposed and the ways in which the firms can protect them against these risks are discussed.
Methods to Protect against Risks
The financial institutions adopt several ways of protecting them against the risks associated with their businesses. In general the organizations can find out the best business practices in the industry with respect to risk management and adopt them in their own organizations. Alternatively the organizations can find convenient ways of transferring the risks to other players in the market or the organizations can employ specialized risk management programs at their organizational level to protect them against any financial loss resulting from the risks.
The best practices in the industry is the normally adopted risk management procedure by most of the organizations in which the organizations take actions like underwriting and reinsurance of risk so that the risks will be spread among the operators which have the effect of reducing the risks of apparent risks associated with the business. In addition the financial institutions may undertake hedging of their balance sheet items to protect any possible financial risks due to change in interest rates or exchange rates if the assets and liabilities are held in foreign companies. The basic objective behind these measures can be seen from the fact that the organizations do not want to carry the risks which are part of the businesses undertaken by them and also to maintain the level of total risks under controllable levels.
There are systemic risks that can be eliminated by a proper assessment of the risks and taking risk protection programs to safeguard the financial interests of the organizations. Similarly in the case of risks that the organizations may face due to the frauds committed by the staff and employees, losses arising out of oversights and mistakes of the employees due to limited control by senior level management - known as operational risks - the organizations can find suitable ways to minimize these risks. In any case it must be noted that the organizations would suffer from possible erosion of profits due to