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By the very nature of the business, the operation of banks involve a lot of risks. For this reason, several methods for commercial bank risk management have been developed as a proactive measure to prevent or mitigate the instance of risk in the management of commercial banks. This includes such methods as the application of outlined processes for the conduct of business and the spreading of the risk burden they bear.
One of the methods for commercial bank risk management is the establishment of standards for the application of the various facilities in the bank. A good example of this is in the standards set by commercial banks for the qualification for a loan. Loans are significant risks that commercial banks undertake due to the fact that a miscalculation could lead to the non-repayment of the loans by those who borrow them. In order to limit high incidences of loan default, commercial banks have to develop and adhere to strict parameters by which to judge the credit-worthiness of a potential borrower before they will make the decision to grant such a person the loan.
This method of commercial bank risk management requires that the person or entity seeking the loan must show a means for the repayment of the loan. Such requirements might include the provision of previous financial statements, the running of a credit check, and the provision of consignees who undertake to repay the loan if the person borrowing the money fails to repay the full amount, plus any interest. Perhaps one of the more familiar utilities for commercial bank risk management is the provision of a collateral in order to access a loan facility. Banks may also require the person borrowing the money to pay a certain percentage of the money he or she is seeking, while the bank assumes the burden for the remainder of the balance.
The process of requiring consignees as a condition for the granting of a loan is simply a measure by which the bank spreads the risk in the granting of the loan. In this case, the consignee assumes a large portion of the risk should there be a default in the repayment of the loan. Banks must also regularly access their performance through audits in order to discover the areas for improvement and in order to assure the various stakeholders in the bank that their investment is secure. Such an audit will reveal any areas of leakages and also make recommendations that may be used to make necessary improvements.
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