Commercial Bank Risk Management: An Analysis of the Process
Posted: 1 Jul 1998
Date Written: April 1995
The past decade has seen dramatic losses in the banking industry. Firms that had been performing well suddenly announce large losses due to credit exposures that turn sour, interest rate positions taken, or derivative exposures that may or may not have been assumed to hedge balance sheet risk. In response to this, commercial banks almost universally have embarked upon an upgrading of their financial risk management and control systems. Coincidental to this activity, and, in part, because of our recognition of the industry's vulnerability to financial risk, we have been involved in an analysis of financial risk management processes in the financial sector. The purpose of this paper is to outline the results of this investigation. It reports the state of risk management techniques in the industry -- questions asked, questions answered and questions left unaddressed by respondents. This report can not recite a litany of the approaches used within the industry, nor can it offer an evaluation of each and every approach. Rather, it reports the standard of practice and evaluates how and why it is conducted in the particular way chosen. But, even the best practice employed within the industry is not good enough in some areas. Accordingly, critiques will also be offered where appropriate. The paper concludes with a list of questions that are currently unanswered, or answered rather imprecisely in the current practice employed by this group of relatively sophisticated banks. Here, we discuss the problems which the industry finds most difficult to address, shortcomings of the current methodology used to analyze risk, and the elements that are missing in the current procedures of risk control.
JEL Classification: G21, G30
Suggested Citation: Suggested Citation