The statement holds true, as banks are facing high risks, primarily because banking is one of the most highly leveraged sectors of any economy. To overcome the risk and to make banking function well, there is a need to manage all kinds of risks associated with the banking. Thus, risk management becomes one of the main functions of any banking service - it is core to any banking service. The ability to gauge risk and take appropriate action is a key to success for any bank. It is said that risk takers survive, effective risk mangers prosper and risk adverse persons perish. The same holds true in the banking industry as well. The axiom that holds good for all business is "No Risk No Gain".
Thus, going further on with same axiom, it's seen that banks, as financial intermediaries are exposed to various risk factors: Market uncertainties, risk due to default in the payment of principal amount or the interest by the borrowers, etc. Hence, banks are required to take certain strategic decisions to know whether the type and amount of risk assumed by them brings them adequate compensation in terms of earning in short-term as well in the long-run and helps them maximize the economic value in the long-term, while being in consonance with their risk appetite. Hence, more effective the risk management framework of an institution, the more successful the institution will be in the long-run. |
