The types of risks and risk management measures which are needed in a Essay - 1

The types of risks and risk management measures which are needed in a financial institution - Essay Example The paper tells that risk is always going to be present in a financial institution and the higher the risk, the higher the return that the institution gets. Basically, risk and return are related in the same direction. A minor example of this would be a bank charging different interest rates on different individuals who have opted for the same loan. The individual who has a relatively poor credit history is likely to receive a higher interest rate as there are chances of him/her not paying the loan bank. Therefore, there is a higher risk and the bank gets a higher return through the higher interest rate charged. However, risk needs to be managed and there can be several huge losses if the financial institution is not ready to deal with it. Risk management is a type of strategy which every financial institution needs to have at its core and there are several parts involved in this including monitoring the risks, measuring these risks and controlling risks. It is the analysis of risk m ixed with the element of quality risk controls. Risk management is required by banks and financial institutions as a safety measure to protect the institution from any major financial problems. The uncertainty and the potential inherent risks that come with the financial markets makes it important for most of the financial institutions and banks to use risk management. The risk management controls are one of the major determinants of the financial stability of a bank. Systematic risk is also known as diversifiable risk. Basically, this particular type of risk means the risk of the change of asset value associated with systematic factors. Therefore, the risk cannot be fully diversified. There are several subcategories under systematic risks and there are various ways in which the value of an asset can be affected. The determinant of the change in the value of the assets owned by the institution and it depends upon natural and economic factors including interest rates affecting the va lue of the assets, an increase in inflation might cause an increase in fuel prices which might affect transportation and stock value and changes in economic conditions which may cause several changes in the value of