Methodology of Risk Management in Local Banks of Pakistan

Abstract

Risks in financial services are larger in scope and scale than ever before. Along with revenue maximization and operational cost minimization, risk management has moved to center stage in defining superior performance. Differences in risk management philosophy and technique can produce prosperity, mediocrity, or failure. No senior management of today's financial institutions can perform its function without a vastly expanded understanding of the dimensions of risk and the various tools to manage it. Banks are in the business of risk. Many of these risks are of a traditional sort: credit risk, interest rate risk, liquidity risk. However, numerous risks are more recent, such as regulatory risk, currency risk, and human resources risk. The past couple of decades have seen dramatic losses, in the global as well as local, banking industry. Firms that had been performing well suddenly announced large losses due to credit exposures that turned sour, interest rate positions taken, or derivative exposures that may or may not have been assumed to hedge balance sheet risk. In response to this, banks have almost universally embarked upon an upgrading of their risk management and control systems. During the same time period, the understanding of the place of commercial banks within the financial sector has improved substantially. Much has been written in academic literature and financial press regarding the role of commercial banks in the financial sector over the period of time. The ability to enhance market knowledge, transaction efficiency and funding capabilities, one has to seek market participation of financial institution in terms of services which perform a vital role and act as a principal in the transaction. Balance sheet must be used to facilitate the transaction and to absorb the risks associated with it. Undeniably, there are activities performed by banking firms which do not have direct balance sheet implications.