Operational Risk Management
Operational Risk Management Is Not Just For Technicalischer Responsible For Risk or Any Other Approach To Management
Failure or success in any operation is dependent on three factors. What those three factors are and the method to manage those factors is in this article. Note all of these factors can be controlled using risk calculation and management, however; nobody really would be able to do that, without a thorough robust approach to risk management. Operational Risk Management
Understand that what makes a successful operation of a business is its manage; risk is also the critical driving force of the entire operation.
The first element to understand is that risk is a process, not an event. It is not finished and it only becomes a process once those decisions have been made and implemented. In an earlier article I referred to processes in defining risk. What processes control risk is a three legged stool process. Risk is not a single element; it is a process. To manage risk we must first define what risk is. We live in a highly unpredictable world in which the outcome of any business decision is not concrete and predictable, but Probability is what the successful banker is taught to manage.
Example counselors and bankers are taught to manage Probability by means of Pivot Points where the borrower makes a decision to take a loan, or an investment and the banker determines the probability of the borrower remaining in the loan or investment. The banker determines the prior ratio and then moves further into an investment which will at best give the bank a rate of return in the alternative that the borrower would take. Risk Number Two, that is the question, is how to manage the risk. We will look at these factors in later articles.
Just how does risk predetermine the outcome of a business decision? How can it mitigate or avoid a bad outcome without complete insight into the prospective business. Professional bankers and advisors have for years used statistical probability. This is historical information and probability or a event. For example if an investment was made, the prior ratio becomes the statistical probability of the event happening. The opposite of this would be if all who invest in that option all exit the investment. This information would make an overall assessment of the degree of risk and the risk for each decision. Operational Risk Management
Risk Number Three is the relationship between risk and opportunity. A risk can be seen as a “No True Thing” or an event that is unlikely but can happen under certain circumstances. Risks are either “Good” or “Bad” depending on the likelihood. Do you develop a certain attitude towards the possibility of bad risks? Do you allow yourself to be convinced by others and by media that the chance of risk is strongly correlated with chance? or “Do you believe that risk is reducing around you and has been for centuries.” These are your opinions and these are the decisions that you make every day.
When a bank or a large investment company makes a risky investment the cost of that investment is called an “unsecured loan.” The risk is related to the transaction, however the lender takes on a much greater risk than he would have done if the same transaction had been made with a lesser degree of risk.
Risk Management is best done at the inception of an investment or when a decision is about to be made. The process is best implemented and enforced by professional and non-professionals including bank analysts, portfolio managers, and investment advisors. Risk management is NOT the same as Risk Reduction. Risk Reduction attempts to reduce the risk to a stable degree where the risk exposure can be identified and the possibility of loss meaningful. The objective of risk management is to identify and quantify risk and measure it.
The investment we shall now talk about is risk management. We introduce risk management by discussing some of the core components to risk management and strategies to range the increase in risk.
We have already touched on the risk and what it means by stating that risk is a process; one should survive and prosper during a recession. We see then that risk management falls under investment and finances because just like a stock portfolio the experience and knowledge of an individual is important. Companies and investors are much more important than a stock portfolio.
We have to look at what makes up a company’s risk. There are a number of components: Operational Risk Management Is Not Just For Technicalischer Responsible For Risk or Any Other Approach To Management
• Market risk represents the market being affected by a company’s business.• Assets of the company represent its value.• Market risk or market vulnerability represents the uncertainty of future economic conditions.• Diversion represents the ability to liquidate assets.• Profit includes compensation, income.
Investors can expect that if there is high (high risk) and little profit that the market value will take a beating and investors will not be able to recover their losses. Thus we find that the interest rate that a company retains will affect its valuation. Also when interest rates drop those investors will not be so lucky.
When a company borrows money (loans) from banks they are creating interest rate risk.