Models Used In Risk Management By Banks

Risks are a natural occurrence within the market and between institutions. Especially in institutions where financial transactions take place, the presence of risk is a necessary and natural process. The fact that these institutions and transactions carry risks requires significant efforts to be made. Especially important organizations, such as banks, make significant investments to be able to manage their risks. Banks and other institutions should conduct different studies to prevent problems caused by risks. Particularly in today’s world, it is observed that many banks increase their security with technological opportunities. However, it is not enough to develop only opportunities and equipment in terms of risk management. Suitable models and strategies should also be created to manage risks. A bank or financial institution must act within a constantly renewed framework to minimize risks and avoid their negative impacts.

Banks and financial institutions have important economic value. Therefore, we can also say that they carry risks in many aspects. Additionally, banks provide many services and products in accordance with the demands of their users. The services offered must be of such quality that they can be returned to the bank. However, one of the most significant risks in banking is the lack of return on the services and products offered. Due to this situation, banks can often suffer significant losses that affect the institutional structure. In order to prevent these and similar situations, as with every institution, banks also need to improve their risk management skills. Risk management studies are among the important topics that many contemporary organizations focus on. It is essential for banks to create risk management models that offer features that protect both users and the institution. It is important for the models and strategies created in the finance field to be based on scientific studies for success.

Organizational Structure For Risk Management In Banks

Banks and financial institutions are fundamental institutions in today’s economy. They have important functions due to the services and products they offer in many areas. Through banks, investors, entrepreneurs, and individuals can easily meet their needs. Especially due to the economic services offered by banks, it is seen that they have developed significantly. However, banks are at significant risk due to the services and products they offer. It is especially necessary to re-enter the bank by including certain fees for the services provided. However, it is observed that banks suffer significant losses due to various problems and supervision-related problems during the process. Especially when countries face economic difficulties, banks experiencing these problems seriously affect the institution. When banks experience problems during economic crisis periods, they face the risk of bankruptcy. Therefore, it is mandatory for banks to develop their own risk management understanding and work in this area.

When creating risk management models for banks, attention should be paid primarily to the organizational structure. In order to provide internal audit and internal control functions for risk management work, banks should employ personnel and ensure continuous work in this field. Especially, banks should evaluate the risks of the transactions and services provided by establishing inspection boards. If the results of the controls and evaluations show high-risk premiums for the services provided, necessary regulations should be made. Especially if banks are faced with a risk that they will manage after the controls and analyses, they should start working to take precautions.

Management Of Credit Risks In Banks

One of the most important services offered by banks to users and investors is loans. Banks offer different types of loans according to different needs and requirements. It is essential for users to meet their needs in certain ways by taking advantage of loan options. Banks should offer this service based on their risk management skills when lending to users. Especially when approving loans and setting limits, banks should significantly evaluate their credit risks based on these evaluation results. Banks should especially assess the creditworthiness of the counterparty well when providing credit. Loans should be allocated based on the risk rating system of the institution or individual to whom the credit will be given. Due to the significant risk involved in lending, there can be many problems with loans for banks. Therefore, it would be correct for banks to evaluate both bank risk and customer risk well when lending.

To prevent banks from incurring any losses or facing different risks, risk models related to loan options should be developed. Especially, customer profiles should be created by creating loan options in different fields, and important criteria for loans should be determined. In particular, the amount of credit that can be allocated by pricing the risks of customers should be accurately determined. It will be an important protective factor for banks to perform risk-return pricing for customers regarding loans. In addition, it will be a significant protective factor for banks to request certain collateral while granting loans, and these collaterals should have significant values. It would be appropriate for banks to carefully create and offer loan services by creating risk management models.

Portfolio Management Styles Of Banks

One of the most important issues that should be included in banks’ risk management models is portfolio management. Banks are not just institutions that offer credit or credit card services. Banks are also organizations that invest in different areas and operate in the market. Therefore, banks need to create their investment portfolios and debtor limits in a qualified manner. One of the most important things banks need to pay attention to while providing portfolio management is ensuring active passive management. Especially for banks’ balance sheets, the situation of active and passive assets is very important. It will be quite difficult to manage the portfolio, especially due to the mismatch between active and passive sources. Additionally, banks need to secure their portfolios against interest and liquidity risks.

Banks And Market-Risk Situations

Banks need to manage the risk they create in the market for the service products they offer. For this, banks need to calculate market risk by creating control mechanisms. When a bank using a market risk model takes its risk situation into account, it also performs tests directed at the past. In this way, the risk situation of the bank in terms of the market is reviewed. Especially with the help of the market risk model, problems in trading portfolios can be solved and factors causing losses can be prevented. Taking market risk situations into account, banks need to develop their risk management by paying attention to economic capital and market risk limits. When banks create their risk management models, they should take advantage of contemporary approaches and create a good internal control mechanism. In this way, banks take measures against many risks in the market.

See you in the next post,

Anil UZUN