the narrow prism defining financial risk?

Risk covers various functions in a financial services company ranging for strategic to operational risk and reputation to managing money. There is no one single sphere that risk does not touch. We like to think it that way that whatever unexpected events one can conceive which has a decent likelihood of occurring the risk management likes to factor them.

When I started off in risk, the concept or the field was developing quite fast because of the credit crisis. Though there were some methods for estimating risk were being used none of them could educate a beginner as to

• Why risk management is important?
• What is risk?

We seem to answer through the limited coverage of banking affairs in the overall business management and minimize any rude surprises occurring in the former. But that was the period around 2010.

Now we quite fully understand through checks and controls and restrain through ethical conduct a more resilient and enduring definition of risk.

Though this has not quite percolated to businesses like front office sales in manufacturing sector companies i.e. areas other than banking as much as what may be required but it still reinforces the belief that a common conduct and value system can mean good business.

Coming to financial risk, what initially started as developing a capital cushion for losses encountered in due course of business i.e. all kinds of risks while carrying out a financial transaction so that one does not mis-sell, has remained at that. More risky the bank gets more capital you have to keep and your return on capital diminishes. Striking the right balance of risk and returns has become the key.

But does it cover all? What if an airplane crashes and causes damage to property and business is shut for a few days. Worse all operations have to be relocated. Can you still quantify the loss? Is the financial impact of a plane crashing on your building a financial risk? Does the bank need to set aside capital causing its return on capital to not make sense?

I think I gave it away in the last question…