The Principles of Banking, 2nd Edition

CHAPTER 18The Risk Management Framework

Abstract

Sound risk management must be at the heart of a bank's strategic objectives, both as an end in itself and to facilitate the achievement of the bank's business objectives. The ultimate aim is to protect the bank's long-term viability and to produce sustainable medium- to long-term revenue streams. A bank must be committed, in practice as well as on paper, to effective risk management processes to ensure a robust and viable balance sheet over the long term. This is achieved through the maintenance of appropriate risk strategies, infrastructure, organisation and governance, together with a strong risk management culture embedded throughout the organisation. This chapter describes a template bank risk management framework, which includes the risk strategy, risk appetite framework, risk appetite statement, risk monitoring and reporting, and the principal risk categories and how they are managed.

In today's world everything in banking revolves around risk management. Essentially this involves regulatory compliance and risk management, but also other aspects of the discipline not necessarily driven by supervisory demand. We discuss the nature of risks that banks are exposed to in the ordinary course of business, and then present a template risk management framework, incorporating risk appetite statement, that is appropriate for most commercial banks.

RISK EXPOSURES IN BANKING

We need to be familiar with the risks inherent in the ...