Credit Risk and Risk Management

For a bank to be successful it has to manage a number of risks that are inherent in the business of banking. Credit risk is the largest single risk for a bank, that is, clients not repaying monies that have been borrowed on the asset side of the balance sheet. Market risk exposure is the next biggest challenge for the risk manager, especially if the bank has large trading positions in a multitude of products and derivatives. Poor control in either of these areas can easily wipe out all of the profits a bank makes in a year and in some cases small banks have actually failed. Other risks that banks must pay attention to are settlement and payment risks, liquidity or funding risk, foreign currency risk, gearing risk, operating risk, country risk and global political risk. Managing all these diverse risks is the monumental responsibility of the risk management group in the bank.