Risk Management in Banking: A Review of Principles and Strategies

Abstract

Banks play an important role in the financial system contributing to efficient and well functioning transfers of capital and risk between those in excess (savers) and those in need (borrowers) of money. Traditionally, financial risks, like interest rate, foreign exchange and credit risks, have been the most important and typical ones for banking operations. However, lately the risk environment of banks has changed considerably. In this study we are stressing the vital importance for the single bank to have a much more sophisticated and well-structured approach to risk management than it had 15 years ago. Our main focus is on how banking objectives such as profitability and growth should govern risk management, and how these objectives are made operational into the management of those assets and liabilities exposed to changes in market prices and in customer repayments of loans.