ABSTRACT
Managing risk is an old habit of human beings. In their day-to-day lives, people always seem to be worried about future risks. As a result, they end up investing in insurance or other investment methods to secure themselves against unforeseen risks. Accidents, environmental disasters, bankruptcy, and loss of business are risks that have plagued the human race since time began. Generally, no complete protection exists against every potential risk, but appropriate proactive measures to mitigate certain risks can be adopted. The same concept also applies to financial organizations. Understanding risks has always been a fundamental, if only implicit, management process in financial organizations. What is new is the following:
The increased explicit awareness and consciousness of managers and senior management of risk issues
The explicit and analytical approaches
The greater awareness to direct an organization’s risk profile toward those risks for which it has a comparative advantage in managing
The pressure to allocate resources more consciously
Risk management was in its elementary stages until the 1980s. It was not recognized as part of the business management process but only as a method of taking precautionary measures when business went wrong. The concept was, “Do business and then measure the risks,” whereas in today’s economy, the concept is, “Measure the risk first, then do business.” Thus, during the late 1980s and early 1990s, apart from profit-making goals, organizations were faced with other goals, such as accountability, transparency, and performance, as demanded by their investors. Risk management has always been a fundamental management pr ocess in financial organizations. It is a well-known fact that where there is money, a certain amount of risk must be involved. In the realm of the financial domain today, the term “risk” is being used more frequently. It is recommended that operations integrate risk management into decision making in the same way it has already integrated such critical factors as time, money, and labor. Managing risks effectively has become the duty of everyone involved in financial organizations. Nowadays, however, there is more pressure to avoid things going wrong while continuing to improve corporate performance. By monitoring risk more closely, financial organizations can minimize the required amount of reserve capital and maximize their profitability.
