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What is Risk Management

There are thousands of definitions of Risk Management. Specially considering the vast application that Risk Management and respective processes might have, in different contexts and businesses. In this blog, we focus specifically in Risk Management within the financial services arena.

A distinct aspect of the financial services industry is the fact that professionals manage risks on behalf of their customers and sometimes of their own firms. This is almost always directly related to financial risks and capital that clients or a firm commits to be “on risk”.

Several definitions below can be used to define Risk Management within the financial services context.

Risk management is the practice of using processes, methods and tools for quantifying and managing these risks and uncertainties. Risk is generally discussed as if it were synonymous with uncertainty, but there is a technical distinction between the two. Variability that can be quantified in terms of probabilities is best thought of as risk; but variability that cannot be quantified at all is best thought of simply as ‘uncertainty’.

Source: CISI – Risk in Financial Services

Risk is part of all our lives. As a society, we need to take risks to grow and develop. From energy to infrastructure, supply chains to airport security, hospitals to housing, effectively managed risks help societies achieve. In our fast paced world, the risks we have to manage evolve quickly. We need to make sure we manage risks so that we minimise their threats and maximise their potential.

Risk management involves understanding, analysing and addressing risk to make sure organisations achieve their objectives. So it must be proportionate to the complexity and type of organisation involved. Enterprise risk management (ERM) is an integrated and joined up approach to managing risk across an organisation and its extended networks.

Because risk is inherent in everything we do, the type of roles undertaken by risk professionals are incredibly diverse. They include roles in insurance, business continuity, health and safety, corporate governance, engineering, planning and financial services.

Source: Institute of Risk Management (IRM)

Risk management is the process of identification, analysis and either acceptance or mitigation of uncertainty in investment decision-making. Essentially, risk management occurs anytime an investor or fund manager analyzes and attempts to quantify the potential for losses in an investment and then takes the appropriate action (or inaction) given their investment objectives and risk tolerance. Inadequate risk management can result in severe consequences for companies as well as individuals. For example, the recession that began in 2008 was largely caused by the loose credit risk management of financial firms.

Source: Investopedia – What is Risk Management

Financial risk management is the practice of economic value in a firm by using financial instruments to manage exposure to risk, particularly credit risk and market risk. Other types include Foreign exchange risk, Shape risk, Volatility risk, Sector risk, Liquidity risk, Inflation risk, etc. Similar to general risk management, financial risk management requires identifying its sources, measuring it, and plans to address them.

Source: Wikipedia – Financial risk management

In the world of finance, risk management refers to the practice of identifying potential risks in advance, analyzing them and taking precautionary steps to reduce/curb the risk.

Source: The Economic Times

As stated above, there are thousands – if not millions – of written materials and publications about Risk Management as a discipline. In this blog you will find constant publications addressing core elements of Risk Management for the financial services industry.