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Risk Management Framework for Banks

Section 1: Risk Analysis

To effectively manage risks, banks need to analyze and understand the types of risks they face. While quantification of risks is ideal, it can be challenging for certain types of risks, such as reputational and operational risks. In these cases, qualitative measures should be adopted.

• Quantification challenges: Quantifying risks can be difficult or impossible for certain types of risks.
• Qualitative measures: Qualitative measures should be used when quantification is not possible.
• Risk analysis goals: Risk analysis aims to identify, assess, and measure risks to inform decision-making.

Section 2: Risk Evaluation

The goal of risk evaluation is to determine which risks need treatment and prioritize their mitigation. This involves comparing the level of risk identified with the bank’s risk appetite, tolerance level, and regulatory limits.

• Risk evaluation goals: Determine which risks need treatment and prioritize their mitigation.
• Comparison criteria: Compare risk levels with risk appetite, tolerance level, and regulatory limits.

Section 3: Risk Treatment

After assessing exposed risks, banks should choose the best option to eliminate or mitigate unacceptable risks. Options include avoiding the risk, accepting and retaining it, reducing likelihood or impact, sharing the risk, or selecting a combination of these options.

• Risk treatment options:
  • Avoiding the risk
  • Accepting and retaining the risk
  • Reducing likelihood or impact
  • Sharing the risk
  • Combination of options

Section 4: Risk Management System

A bank’s risk management system should have policies, procedures, limits, and controls in its foundation. The system should provide adequate, timely, and continuous identification, assessment, measurement, monitoring, mitigation, and reporting of risks.

• Key elements of a sound risk management system:
  • Active involvement of the board and senior management
  • Adequate organization
  • Appropriate management information systems
  • Comprehensive internal controls