Risk management consists of identifying, measuring and managing financial risks within an organization. In recent years banks have paid a lot of attention to improving their risk management function. Other financial and non-financial organizations, however, are increasingly acknowledging the need to improve their risk management as well. Despite the fact that the structure and operations of organizations can differ substantially, the concept of risk management typically can be applied in a similar fashion.
However, different types of organizations are exposed to varying risks. For banks and other financial institutions the management of financial risks such as market and credit risk is part of the core activities. For corporates and public sector organizations, financial risks are more likely to result from their operations and capital structure. Operational and non-financial risks are inherent in business, irrespective of the type of organization.
The main objective of risk management is not to eliminate or to minimize the risks themselves. Instead, sound risk management helps to identify and understand the risk profile in order to align the business with the accepted level of risk. Zanders can support in the development and implementation of the risk quantification and the corresponding risk governance. Also, Zanders can assist your organization with selecting and implementing risk management systems.
It is possible to distinguish between risks that need to be mitigated as much as possible and risks that are consciously taken by the organization. Operational risk is an example of the former category, whereas business risk is an example of the latter. Market, liquidity, and credit risk are more difficult to classify. Typically, an organization needs to take a certain amount of these risk in their daily operations. It is important, however, that these risks stay in line with the predefined risk appetite of the organization.
Zanders classifies financial risks as follows:
