Banks, being highly leveraged entities, are required to put in place an efficient risk management system. While market risk, credit risk and operational risk are the three principal risks, Basel II sharply focuses on managing these risks through a suitable corporate governance structure.

Risk management has been a very important component of business plan for the banks and an undercurrent of risk mitigation and planning has always been part of the banking business. There have been conscious efforts in minimizing the risk without affecting the business opportunities since the early days of banking. However, with the increasing volume of business and complexity in financial transactions and instruments involved, the depth and nuances in risks faced their management have considerably increased.

Risk management was relatively easy in stable environments and under predictable circumstances of interest rates and forex rates. However, with increasing volatility in the markets that is more in tune with the market moods and opening up of the financial markets as well as the resultant more free flow of capital across borders, has made risk management more complex. With the increasing use of derivatives and securitized products that tend to shift credit risk, a more sophisticated risk management practice has to be put in place. Apart from the risks arising out of the increased sophistication in instruments, sophistication in technology is another major risk prone area that calls for a robust safeguard for possible operational risks. More points of contact between customers such as Automated Teller Machines (ATMs), and increased use of mobile banking and net banking have made it necessary to have better technologically-enhanced safeguards against hacking and other data theft and misuse. Increasing competition in the financial markets by way of new banks entering the field, rivalry with established players, increased merger activities in the banking sector have contributed to the consolidation in the banking industry and increase in business risk with the increased necessity to offer unique and complex products.

There have been perceptible changes in the risk profile of the banking sector with increasing volatility in the financial markets in the last decade and a half. The introduction of complex structured products and increased volumes of transaction have necessitated the introduction of quantitative risk modeling techniques to be more in tune with the challenges thrown by these changes.

Risk Management in banks, Automated Teller Machines, ATMs, Mobile banking, Net banking, Banking industry, Global economy, State Bank of India, ICICI Bank, Reserve Bank of India, mortgage markets, Global financial markets, Interest Rate Swaps, IRS, Export Credit Guarantee Corporation of India, ECGC, Bank of International Settlements, BIS, Management Information systems.