Risks Overview

The future is uncertain. Uncertainty in future business is fraught with risk. Risk involves situations or events that may or may not occur, but whose probability of occurrence can be calculated statistically and the frequency of their occurrence is predicted from past experience. Thus those future events where the probability of outcome can be quantified are called risks. Uncertain events are those whose outcomes cannot predict with statistical confidence. Thus the future event the probability of the outcome of which cannot be quantified is called uncertainty.

 Banking is a service industry and is profit-oriented. Banking is an intermediary operating to maximize the wealth of stakeholders and stockholders. Profit maximization and wealth maximization are not the same. The profit motive may be short term i.e. for a year or two whereas wealth maximization is a long-term objective and refers to the growth in value of the ownership. Bank management may adopt an aggressive policy of business and take the risk to earn a good profit for the year but at the same, the higher risk may cause adverse business results and may lead the bank to failure. Therefore the management must find a trade-off between the higher profit and the future uncertainty regarding the business results.

 Risks associated with the services industry are difficult to quantify. Likewise, risks involved in banking operations are also difficult to quantify but not impossible. Risk management is the process to identify, assess, quantify, control, and monitor the risks in the operation of financial services.