Risk management is the process by which a business seeks to reduce or mitigate the possibility of loss or damage inherent in the industry. In banking, there are many types of risk management programs that may be used to diminish the possibilities of monetary loss, lawsuits, and employee safety. Bank risk management may take many different forms, including lending and investing strategies, employee training, or security.
A key factor in bank risk management is the means to identify sources of risk and enact efficient plans to counteract it. Banks often employ whole teams of risk management professionals that put the business through a cycling process of identifying risk, crafting solutions, and implementing new strategies. Some experts suggest that this cycling process helps prevent small issues from becoming large ones by ensuring review of bank actions on a daily or weekly basis.
One of the largest concerns in banking risk management is the potential for financial loss through default. This occurs when those who have loans, such as mortgages or credit lines, are unable to make payments and fall into default. In the case of bankruptcy, these loans may be dismissed by the courts and never repaid in full.
In order to counteract inevitable losses, banks must ensure a healthy profit, through fees and investments, as well as use tactics such as screening programs to try and eliminate risky borrowers. Some may increase interest rates on higher-risk loans to ensure that any losses may be covered. Others require collateral, such as a house lien, until the loan is fully repaid. Moreover, banks tend to put very strict lending limits into practice in order to ensure that the stable profits of the business are not exceeded by the risk of the loans.
In addition to protecting against uncollectable loans, bank risk management also involves security considerations. Since banks are vulnerable to robbery, precautions such as armored transport trucks, armed guards, and security cameras and alarms are usually standard procedure. Bank employees are also trained in how to behave during a robbery, where safety is a primary concern. Bank risk management also includes efforts to reduce the opportunity for internal theft or fraud, by maintaining a careful watch on employee transactions.
Bank risk management also includes consideration of the internal issues that happen in any workplace, such as harassment, wrongful termination, or other employee-related lawsuits. Employees typically go through a training period or are given materials that detail the policies on acceptable behavior in the workplace. Some banks periodically require training sessions on customer service, diversity awareness, and other topics that can help reduce the risk of lawsuits.
No business is immune from the possibility of risk. Though bank risk management programs cannot always ensure that problems do not arise, they can help businesses survive crises through careful contingency planning and employee training. Moreover, the practice of risk management can help customers gain a sense of trust with the bank, which in turn may engender customer loyalty.