A Strategy for Risk Management at Banks:3 Steps to Solving Risk

The rules of international banking guide many business processes by establishing limits for profit and loss. In risk management, international banks and other financial institutions control loss resulting from inadequate and failed internal processes, systems, and people as well as external forces by adhering to policy like the Basel II supplement established by the Bank for International Settlement; BIS operates certain functions of banking for central banks and international organizations.

Two main occurrences of operational risk including fraud and IT failure resolve in the supplement which provide banks an answer to the current crisis. For successful risk management banks should follow these three steps as suggested by the Capital Asset Pricing theory.

Managing Risk and Scenarios

When considering operational risk bank managers should attempt to control fraud. Loss resulting from fraud happens when a group organizes to enter a position to disrupt the flow of business service by disavowing the rights and duties of the established management.

A familiar incident of fraud, problemed business mergers, provide an example of risk for analysis. The 2008 crisis suggests several corporations experienced some financial insecurity during the millennium which lead to corrupt business practices.

Many corporations and smaller business firms did not continue certain business transactions due to practices that caused debts and other penalties in the beginning of the first decade. A popular case, the Lehman Brothers incident proves that banks lacked confidence about the progress of some businesses. The facts remain.

If risk from fraud occurs at international banks, then regional banks must answer another threat. Certain reasons of risk are inherent only after a control has been implemented in banking policy creating a “scenario” to which officials must respond. Rules bend based on security.

IT Failure

Yet, other risk occurs when external forces act upon IT systems. Failure within IT systems exist after Storms, earthquakes, and other forces of Nature happen. Damage to hard drives can cause systems to slow down and frequent disconnects from ISPs.

When ISPs deny service after weather conditions or other reasons, IT failure occurs. After 9/11 IT teams still hold responsibility for monitoring and controlling failures in mainframes; IT teams prepare the changing agenda for networks as we approach the second decade.

There are instances when an ISP should deny service to customers who are in danger of breaching service agreements. If involved in behavior that causes reason to believe that illegal acts, such as hacking, etc., a customer’s rights to service can be suspended or denied.

Severe cases of viral attacks can also damage to IT systems and lead to failures. It is imperative for IT members to implement security systems that can prevent costly damage to the network; a weak security system leaves the network open to viral attacks.