The risk management tools and techniques used by banks

Abstract

Banks are exposed to several kinds of financial and non-financial risks. Hence, risk management is practiced on a regular basis by banks in order to manage and control the risks that they encounter during their operations and those that they may face in the future. Risk management is important in the banking and financial sector because the way banks control and address risks affect the success or failure of their projects or the institutions themselves.

The main aim of this dissertation is to examine the effectiveness of the risk management tools and techniques that banks adopt in order to reduce and minimise their exposure and thus survive so as not to end up in bankruptcy or out of business. A comparison with global financial institutions is also included in this study to achieve an international perspective on risk management.

This dissertation also aims to identify, if possible, any risk management tool or technique which is appropriate to a particular bank’s mode of operation and therefore would not be so common in all banks. In order to answer the research questions, “What are the risk management tools and techniques that banks use?” and “Are there any unique methods that the bank uses when compared to others?”, qualitative and quantitative approaches were opted for. Qualitative data was gathered through individual semi-structured interviews with six banking sector risk officials, who have adequate experience in the respective field. Quantitative data gathered through an examination of global surveys conducted by international accounting firms and journals has also been carried out and compared to the local scene.

Analysis of the interviews and surveys was carried out in order to extract information as related to the topic in question and to compare and contrast the techniques as used by these financial institutions during the carrying out of their business. The findings from this dissertation display that credit and operational risks were the main top risks faced by the banks interviewed, with cyber and regulatory/compliance risks considered as significant new risks. This study also concludes with a statement saying that risk management has helped in improving banks’ financial and operational performance. In addition, it is mentioned that a risk culture should be in place within the banks to enhance risk communication throughout the whole organisations.