In the realm of finance, risk management refers to the process of analysis, identification, and acceptance of the ambiguity of financial decisions. In other words, it refers to the practice of adopting tools and methods to manage and quantify the uncertainties faced by the finance industry. Normally it refers to the threat that banks face in the form of income flow. Risk management takes place in every sector of the financial world. The industry of financial services is dynamic in terms of innovative ideas, products, and unique ways of handling the business. The business of the financial services industry has remarkably changed and expanded over the years. Among all the innovation that has taken place, it is necessary to be aware of the risks caused by products and business techniques.
Financial risk arises from the borrowing and lending decisions of a bank and any other financial institution. These risks are the results of the banks’ operational decisions. Moreover, adverse market conditions can also provide some financial risks. In this regard, there is a need to be aware of different risks and define policies to manage and avoid the occurrence of these risks.
Financial crises in banks and financial institutions are often due to mismanagement and not caused by any misfortune or environmental conditions. It suggests that the banking sector’s risks are mostly systematic in nature and are a consequence of human nature and trading structure. However, the systems of risk management are also required to ensure the consideration of various uncertainties and environmental factors that can affect a human’s decision-making.
Risk management has a significant role in financial organizations’ processes, particularly for banks where the operational risks are also regarded as financial risks. There is a need for numerous Turnbull notions to carry out risk management in banks effectively. According to this approach, banks’ management should consider regulating risks since the risk factor cannot be eliminated.
BCM maturity model
In order to achieve the continuity of business and operations, there exists a management method that addresses people and processes that appear critical for an organization’s survival. The method that ensures the continuity of such processes is referred to as Business Continuity Management (BCM). Many studies and researchers have maintained support for the BCM model. Among them, most researchers have developed great insight into the implementation requirements of the BCM model. This study defines various areas into which the BCM maturity model can be implemented. It also provides a scope for determining the BCM maturity of an industry or organization.
Financial Institutions and large organizations need to focus on the risks that become a threat to business operations continuity. Ensuring that the banks sustain their competitive position, the data must be accurate and confidential. Although banks use BCM to support their electronic systems, the systems lack some maturity in terms of efficient working. Thus, by analyzing the banking sector, it is imperative for all financial institutions to come up with a contingency plan in the shape of the BCM model.
However, it is observed that some conflicts prevail in the literature regarding the kind of risks that different banks face. It is observed in two different standpoints of competition, namely competition-stability and competition-fragility. According to the first viewpoint, i.e., competition-stability, the high level of power between the banks results in the exploitation of the market power for charging high-interest rates. It will result in incremental risk because the repaying of loans becomes harder and will lead to problems. On the contrary, competition-fragility demonstrates that smaller banks in more competitive environments are more likely to take extreme risks as compared to large banks. Moreover, the domain of financial risk management is further broken down into operational risk management, credit risk management, and market risk management.
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