Risk management - Sample

RISK INSIGHTS FEBRUARY 2022 –Volume I We are your safety net We are your safety net EVOLUTION OF RISK MANAGEMENT. “Risk management” helps an The use of derivatives as risk management tools started during the 1970s, and organization to identify, evaluate, analyze, expanded rapidly during the 1980s, as monitor, and mitigate the risks that companies intensified their financial risk threaten the achievement of the management. International risk regulation organization’s strategic objectives in a began in the 1980s, and financial firms disciplined and systematic way. developed internal risk management The study of modern risk management models and capital calculation formulas to began soon after World War II. The main hedge against unanticipated risks and perspective of early risk management was reduce regulatory capital. to use of market insurance to protect individuals and companies from various Concomitantly, governance of risk losses associated with accidents. management became essential, integrated risk management was introduced and the New forms of risk management emerged chief risk officer positions were created. during 1950s as substitutes to market insurance, when different types of Do You Know ? insurance coverage become very expensive and inadequate. Some business risks were The study of modern risk management began impossible to insure and / or very soon after World War II. expensive. As a result in 1960s contingent planning activities were established and numerous risk mitigation and self- protection activities and self-insurance tools against some losses were introduced. “ Risk comes from not knowing what you’re doing” -Quarterly Magazine Of Risk Management Unit – Sampath Bank Plc Warren Buffet

FEBRUARY 2022 –Volume I We are your safety net OPERATIONAL RISK ‘The risk of loss resulting from inadequate Traditionally, operational risk involved the or failed internal processes, people and risk of things going wrong with the day-to- systems or from external events including day processing activities of the firm. It has legal risk and excluding strategic and many meanings and often the various reputational risk’ - Basel Committee on financial firms adapt this definition to Banking Supervision (BCBS). All types of produce their own. operational risks can be traced back to four root causes which stem from the above However, the position at present is that definition. The sub-categories of firms have tended to adopt the BCBS operational risk are as follows: definition above but will usually add a statement in their report which  Failure of the processes in place to accompanies the audited accounts about execute business. what operational risk means to their firm and how it is treated by them. Traditionally,  Failure of the people or staff employed operational risk represented any risk that by the institution. was not related to credit or market risk, so the Basel definition of operational risk is  Failure of the systems that are ‘positive’ and also includes external events, developed to support the processes and not just internal processes. the people.  External events within which the people, processes and technology operate. External events or influences include external crime, economic conditions, competition, law, tax policy, and the labour market, the pace of change, war and natural disasters. CREDIT RISK Credit risk is the risk of loss that may occur concentration risk. Default risk is the risk from the failure of any party to abide by the that a borrower will default on or fail to terms and conditions of any financial repay its debts. contract, principally, the failure to make required payments on loans due to an Concentration risk is the risk in a Bank’s entity. portfolio arising from concentration to a single counterparty, sector or country. Credit risk can be broadly divided in to two, namely, default risk and credit The goal of credit risk management is to maximize a Bank’s risk-adjusted rate of .. Quarterly Magazine Of Risk Management Unit – Sampath Bank Plc