Risk Management of Banking

Bank has important role in developing a country. Bank is liable to manage the circulation of money in the country. To do this liability, bank collects money from society and channel the money back to the society as loan in order to support the real sector and economic growth. One thing should be noticed that bank is a business which is closely related to risk. Risk management is highly important in banking and other financial institutions. The global financial crisis in 2008 emerged due to the weak of banking risk management. People, in this term refers to government, central bank, and bankers, therefore must know well the risks which will potentially cause disastrous impact to bank and understand that the emergence one risk may spark other risks. On the other hand, applying good risk management to the banks and other financial institutions will widely benefit to the stakeholders and the economy of the country.

There are plenty of risks which should be well managed by banks. Failure of understanding, recognizing, and managing these risks may harm the bank operations. Some of these risks are liquidity risk, credit risk, market risk, exposure risk, operational risk, reputation risk, legal risk, and strategic risk. The emergence of one risk can spark other risks. When bank cannot handle the credit risk, for instance, the reputation of the bank will diminish significantly or known as reputation risk. The devastating impact of reputation risk is that the trust degree of customers will drop sharply to the bank. It can cause vast withdrawal at the bank in which bank starts to face the liquidity problems or known as liquidity risk. Funds are the blood for the bank, so bank will collapse when there are enormous withdrawal happening.

The application of good risk management to banking and other financial institution can benefit the stakeholders and the economy of the country. A bank which has applied well the risk management can generate high profit. The profit will be enjoyed by both the employees and the stakeholders. Bank also can pay tax in the vast sum to the central government which can be used for financing public expenditure. In addition, the good risk management at the bank will improve the monetary system in the country in order to support the real sector growth. Eventually the economy of the country will grow significantly.

To sum up, risk management should be applied strictly to banking and financial institutions. Failure of applying good risk management may cause devastating impact for the bank operational. The existence of one risk may trigger other risks. On the other hand, a financial institution which applies good risk management can benefit the employees, the stakeholders, and the country. Considering the highly important of risk management of banking, central government through central bank should improve the risk management of banking and other financial institutions in order to strengthen the monetary sectors. Strong monetary sectors may support the growth of real sector and economy of a country.