Risk Management in Banking – The Basics of Risk
If you are even remotely familiar with investment and general financial principles, then you know that it is very important to analyze and manage risk. When we talk about risk, we are referring to the chance that something bad or unwanted might happen. The most basic example of risk occurs when a lender is afraid that borrow is not able to pay back his or her loan with the proper amount of interest. In most cases, the promise of a borrower that he or she will pay back a loan is considered to be an asset, so when the borrower does not pay that money back, it is a big loss for a lender. To get a better understanding of how risk plays a part in today’s financial world, you can learn a little about risk management in banking.
To understand risk management in banking at the most basic level, you can look at the credit check. Whenever a person or a business needs a loan, he or she visits a bank or credit union and asks for the money. This can be for a loan that will help a business to expand, but it also can be for a person or family who wants to buy a house or car. In most cases, to manage risk a banker will look at the credit history and income or value of a potential borrower. For a business loan, a banker might analyze a business’s assets then examine business plans to learn if he or she really can expect to have a loan with interest paid back. For personal loans, a lender might study asset value, income, and credit history.
Of course, a bank does more than lend money, so risk management in banking also plays a part in the accounts banks offer to people and organizations. Chances are that you have or have had a savings or checking account. These accounts increase the value of a financial institution and provide it with cash flow. To make sure that clients will keep positive amounts of money in a bank account, bankers ensure that clients make enough money and also don’t have messy banking histories with outstanding fees and debts.
While risk management in banking might be the easiest to understand, it’s important to remember that risk management is used in all financial sectors and departments. As a matter of fact, smart financial professionals consider risk management to be as integral a part of decision making as potential for profits.