Benefits and Challenges Involved with Risk Management

Benefits and Challenges involved with risk management

Risk taking has been a very fundamental part of the banking business, and the industry could not survive without practicing risk management. Risk management has evolved over the years due to the fast pace and more complex society. When examine the benefits of risk management one should not look at the cost or the additional revenue it would provide, or see it as a process f avoiding risk all together, rather to manage and minimize the adverse effects and losses, these losses which could lead to failure of the financial institution and can lead to a failure in the banking system which then affect the economy financially. Everyone within the institution from senior management too lower level employees should have a clear understand of risk management and how it could benefit the institution by reducing losses.

Other benefits of risk management include better management decisions, and supporting effective and efficient allocation of resources or saving resources. If fewer claims are made risk management could save or allocate resources such as time, capital, assets, and people to help the institution perform to it optimal level. Another benefit that goes hand in hand with the one previously mention is that risk management contribute to the strength and efficiency of the economy by providing a mechanism that is designed to allocate financial resources to their most efficient use. This can lead to higher economic growth.

Other benefits of risk management consist of early detection of unlawful activities, which then reduces or prevent legal liability and protect the reputation and public image of the institution, and increase the stability of operations.

Risk management reduces exposure to future risk, which enhance the ability to prepare for various circumstances; therefore, fewer shocks and unwelcome surprise if the situation occur. Also it helps the institution to focus on internal audit programs which in term would lower compliance or auditing cots.

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