Paper Sample on Risk Management in Banking: Protecting Assets & Avoiding Losses

Introduction

Banking is all about risk management, and it does not work by avoiding risks. Risk management is, therefore, preventing losses by the development of a fitting plan. Risk management, therefore, works to protect the value of the bank's assets and to protect the corporation from potential risks and losses (Elamer et al., 2017). Banking, therefore, is a risky affair, and it requires grit to maneuver around the harsh environment. In economics, deficit and surplus units are forms of economic groups. They all favor financial institutions to move funds between each other. Financial institutions are, therefore, essential entities in the economy, although they face risks (Lim et al., 2017). Asymmetric information creates a problem for economic units, making them use financial institutions to transfer funds between them (Chernobai et al., 2018). Setting up systems and recruiting skilled employees is a useful measure to solve problems created by asymmetric information to ensure that they utilize their funds adequately. It means that they can use the funds for the vital projects, further boosting the economy. Transferring funds between units are, therefore, a risk, and commercial banks manage them their job (Jagtiani & Lemieux, 2019). Risk management and supervision system in commercial banks is part of the system in countries around the world, and China applies the same, even as they face numerous issues.

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Research Questions

• What are the types of risks in banking?
• How does the supervision system of risk management work?
• What are the issues that commercial banks in China face in system supervision and risk management?

Research Objectives

• The study aims to show the types of risks in banking that need management and supervision.
• The research aims to show the changes in the supervision system in risk management.
• The research aims to show system supervision and risk management issues in commercial banks in China compared to international systems.

Statement of Problem

Commercial banks work by risk management, and the system requires supervision. Risk management and system supervision are relatively standard across countries around the world. However, China's commercial banks face issues with risk management and system supervision compared to other countries around the world.

Literature Review

Risk management and supervision are necessary on risk types in financial institutions including credit risk, liquidity risk and market risk. System supervision is essential to safeguard the interests of commercial regarding risk management. Financial institutions in China implement risk management and system supervision practices, but face issues such as high administrative costs, blind competition and non-performing loans.

Types of Risks

Credit risk deals with lending, which is one of the primary operations in commercial banks. It becomes a risk when the clients do not return the credit when they face financial problems (Chattha & Alhabshi, 2017). It results in financial loss, which is a credit risk to the financial institution. Liquidity risk occurs when a commercial bank cannot balance between loan demands, withdrawals and cash needs with its liquid assets. It causes banking insolvency as a result of a low level of liquidity. It means that the bank may be forced to acquire more funds by borrowing, and it is at an extra fee and may interrupt the bank's earnings.

Market risk occurs when systematic factors change the value of the commercial bank's assets. Financial markets continuously trade prices, and it results in market risk. It is impossible to diversify all investment risks, but some markets can help alleviate risks. Managing investment activities can be done using portfolio management to reduce risk as complete elimination is impossible (Kabir Hassan et al., 2016). Conditions of supply and demand determine interest rates. It means that the changing standards affect the expenses and income of banks. Loans and security investments are some of the assets of a bank that bring interest revenue, while deposits are examples of costs as liabilities (Leo et al., 2019).

System Supervision

Risk management is developed by bank supervisors to safeguard the interests of commercial banks and the financial sector. Through supervision, banks can achieve consistency and broad application of risk management practices. Monitoring fulfils four critical functions in a financial institution. It ensures that there is proper governance from the senior management and the board oversight to manage interest rate risk and investment activities (Acharya, 2020). It ensures that there are limits, procedures and policies in the application of risk management practices. It enables appropriate reporting and risk measurement in the financial institution. Finally, it allows proper control of the risk management practices in the commercial bank.

Risk management in supervision is part of an examination process. If a financial institution has a top risk management process, they are most likely to get higher ratings. It, therefore, improves its position in the market with its ability to attract clients and investors to the company. Bank supervision in recent years has focused on risk management activities and measures (Tandon & Mehra, 2017). It means that monitoring aims to reveal whether the bank's assets can withstand risks. Surveillance also reveals cracks in internal controls and management that lead to poor financial performance. It monitors the risk and management procedures to show the economic capital of the financial institution (Xiao, 2016). It allows the financial institution to manage risks and compare them with each other to diversify their investment activities.

Risk Management and Supervision in China

China's commercial banks apply all the risk management and system supervision processes like other countries across the world (Ausloos et al., 2019). However, they still face issues in their risk management and system supervision operations. Commercial banks in China use the branch system; therefore, their cost of administration is high together with an inefficient management structure. When banks expand to new branches, they need to be efficient, and they have to look into the competition (Scannella, 2016). Commercial banks in China have many administrative levels stretching up to five, making risk management and supervision practices challenging to implement (Liu, 2017). They also lead to the high cost of administration which leads to less investment in proper risk management and supervision practices.

Commercial banks in China experience high rates of non-performing loans. It creates insecurity and low profitability of the bank, yet they use up most of the bank's capital (Luo, 2017). With low profitability and non-performing assets, it means that there are small-risk management practices. It forces these financial institutions to take up more loans to keep them afloat in the competitive banking sector (Pan, 2016). Other issues that financial institutions in China face include blind competition and poor profit-making models.

Significance of the Study

The study is vital to show the types of risks that banks have to manage and supervise to survive the harsh banking industry. China applies risk management and supervision practices like other countries across the world, but several issues hinder it. They include blind competitions, non-performing loans and assets and high cost of administration.

Research Methodology

The research methodology is qualitative by meta-analysis. It is the collection and analysis of peer-reviewed articles to gather the necessary information for the study. It is a useful method as documents are easily accessible in online libraries, and they are stable.

References

Acharya, S. (2020). Regulation and supervision of banks and financial institutions. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3563986

Ausloos, M., Ma, Q., Kaur, P., Syed, B., & Dhesi, G. (2019). Duration gap analysis revisited method in order to improve risk management: The case of Chinese commercial bank interest rate risks after interest rate liberalization. Soft Computing. https://doi.org/10.1007/s00500-019-04376-7

Chattha, J. A., & Alhabshi, S. M. (2017). Risk management in changing benchmark rates regime: Prudential implications for Islamic banks and supervisors. Journal of Islamic Finance, 6(Special Issue), 205-230. https://doi.org/10.12816/0047350

Chernobai, A., Ozdagli, A. K., & Wang, J. (2018). Business complexity and risk management: Evidence from operational risk events in U.S. bank holding companies. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2736509

Elamer, A. A., Ntim, C. G., & Abdou, H. A. (2017). Islamic governance, national governance, and bank risk management and disclosure in MENA countries. Business & Society, 59(5), 914-955. https://doi.org/10.1177/0007650317746108

Jagtiani, J., & Lemieux, C. (2019). The roles of alternative data and machine learning in Fintech lending: Evidence from the LendingClub consumer platform. Working paper (Federal Reserve Bank of Philadelphia). https://doi.org/10.21799/frbp.wp.2018.15

Kabir Hassan, M., Unsal, O., & Emre Tamer, H. (2016). Risk management and capital adequacy in Turkish participation and conventional banks: A comparative stress testing analysis. Borsa Istanbul Review, 16(2), 72-81. https://doi.org/10.1016/j.bir.2016.04.001

Leo, M., Sharma, S., & Maddulety, K. (2019). Machine learning in banking risk management: A literature review. Risks, 7(1), 29. https://doi.org/10.3390/risks7010029

Lim, C. Y., Woods, M., Humphrey, C., & Seow, J. L. (2017). The paradoxes of risk management in the banking sector. The British Accounting Review, 49(1), 75-90. https://doi.org/10.1016/j.bar.2016.09.002

Liu, Y. (2017). Regulation, competition and bank risk: Evidence from China. Asian Business Research, 2(1), 42. https://doi.org/10.20849/abr.v2i1.135

Luo, J. (2017). Shadow banking, interest rate Marketization and bank risk-taking: An empirical study of the 40 commercial banks in China. Journal of Financial Risk Management, 06(01), 27-36. https://doi.org/10.4236/jfrm.2017.61003

Pan, S. (2016). The risk management strategies of financial liberalization in China. Proceedings of the 2016 International Conference on Management Science and Management Innovation. https://doi.org/10.2991/msmi-16.2016.31

Scannella, E. (2016). Theory and regulation of liquidity risk management in banking. International Journal of Risk Assessment and Management, 19(1/2), 4. https://doi.org/10.1504/ijram.2016.074433

Tandon, D., & Mehra, Y. S. (2017). Impact of ownership and size on operational risk management practices: A study of banks in India. Global Business Review, 18(3), 795-810. https://doi.org/10.1177/0972150917692207

Xiao, Y. (2016). The research on liquidity risk management of China's commercial banks. Open Journal of Social Sciences, 04(03), 251-259. https://doi.org/10.4236/jss.2016.43031