Positive Risk: Unlocking Opportunities for Projects - Essay Sample

Introduction

Risk refers to an unpredictable event whose occurrence may have a positive or negative implication on the project goals (PRINCE2.wiki, 2017). Essentially, this means that a risk can either present the business with an opportunity or a threat. Positive risk is uncommon since losses occasion the majority of the risk (PRINCE2.wiki, 2017). Positive risk is a condition, occurrence, event, or a situation that provides an outcome that is positive for the project (Dunkelberger, 2018).

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What is Risk Management?

In the general view, risk management can be defined as the process of identifying, analyzing, and accepting or mitigating the uncertainties and threats surrounding the capital and the earnings (SearchCompliance, 2019). These uncertainties can be drawn from a vast pool of sources, such as, legal issues, financial uncertainties, strategic management errors, natural disasters, and other unforeseen accidents (Dionne, 2013). The field of Information technology, the risk associated with data and security threat, have witnessed risk management approaches geared towards minimizing the attacks for the digitized companies (Dey and Kinch, 2008). Thus, a risk management plan includes the company's ways and processes od identification and control of all the threats to any digital assets, intellectual properties, and any personal identification information.

Risk Management Definition in Banking

Risk management in banking can be defined as the logical creation and execution of the plans to deal with losses (Tursoy and Tursoy, 2018). Risk management in banking comprises the strategies, policies, and processes for the identification of risks and the accompanying measurements, i.e., the risk management of risks and the assessment of the risk (Www.nbs.rs, 2019). Additionally, it consists of the appropriate internal organization, such as the bank's organizational structure (The Economic Times, 2019). Risk management system incorporates the efficient and effective processes which cover all the risk the bank is exposed to or may be potentially exposed to during its operations (BAUER and RYSER, 2004). It must have a sufficient internal control system and a suitable information system. Lastly, the system should sufficiently process the internal capital sufficiency assessment (The Economic Times, 2019).

Difference Between the General Risk Management and Bank Risk Management

Though aimed at assessing risks, both general risk management and bank risk management have a difference in strategy, the type of risk, and the approach to the specific risk i.e. the kind of risks each address. General risk management addresses risks like business risks, which seeks to maximize profits and value, non-business risks such as political imbalances and natural disasters, and the financial risks including fluctuation of the stock prices, currencies as well as interest rates (Eshna, 2012). Bank risk management addresses a variety of risks which the bank is potentially exposed to and may include liquidity risks, foreign exchange risk, and other risks addressed below (Eshna, 2012).

Types of Risks for Banking Industry

Liquidity Risks

It is the risk of probable events of adverse effects to the bank's financial outcomes and the capital as a result of the institutional inadequacy to meet all the due liability caused by the withdrawal of the current funding sources, i.e., the inability to gather additional funds generated by the conversion of assets and property due to the disruption in the market, also known as the market liquidity risk (Eshna, 2012).

Residual Risk

This refers to the probability of an event of negative implications on the bank financial outcomes and the capital because the credit mitigation techniques are less effective than the projection, or their applivation fails to have an adequate effect on mitigating risks the bank is exposed to (Market Business News, n.d.).

Operational Risk

It refers to a risk of possible negative implications on the financial results of a bank and the capital resulting from omission, either intentional and unintentional on the employee's work, insufficient internal processes and procedures, insufficient management information as well as other systems (Abdymomunov and Mihov, 2015). Operational risks also include unpredictable external occurrences and might consist of legal risks (Market Realist, 2019).

Risk of Compliance of the Bank's Operations

Refers to a probability of occurrence of an adverse effect on the banks' financial results and the capital as a result of failure to follow the law, requisite standards of operations, counterterrorism funding processes, and anti-money laundering processes (Singh, 2005). This risk also comprises other acts that regulate the bank's operations, specifically consisting of the threat of sanctions by the governing authority and the risk of financial losses and the reputational risk (Sneha Sultania, 2018).

Counterparty Credit Risk

Counterparty risk refers to a possibility of an occurrence arising from the counterparty failure to settle their liability resulting in a negative effect on the bank's financial outcomes and capital (www.bis.org, 2022). This risk occurs in the transactions before the final settlement of a transactional cash flows of the settlement on the monetary liability of the transaction in question (Murphy, n.d.).

References

Abdymomunov, A. and Mihov, A. (2015). Operational Risk and Risk Management Quality: Evidence from U.S. Bank Holding Companies. SSRN Electronic Journal.

BAUER, W. and RYSER, M. (2004). Risk management strategies for banks. Journal of Banking & Finance, 28(2), pp.331-352.

Dey, P.K. and Kinch, J. (2008). Risk management in information technology projects. International Journal of Risk Assessment and Management, 9(3), p.311.

Dionne, G. (2013). Risk Management: History, Definition, and Critique. Risk Management and Insurance Review, 16(2), pp.147-166.

Dunkelberger, D. (2018). ERM [Part III]: 5 Examples of Positive Risk | I.S. Partners, LLC. [online] I.S. Partners. Available at: https://www.ispartnersllc.com/blog/erm-5-examples-of-positive-risk/ [Accessed 3 Mar. 2020].

Eshna (2012). Financial Risk and Its Types. [online] Simplilearn.com. Available at: https://www.simplilearn.com/financial-risk-and-types-rar131-article [Accessed 27 Mar. 2019].

Market Business News. (n.d.). What is residual risk? Definition and meaning. [online] Available at: https://marketbusinessnews.com/financial-glossary/residual-risk-definition-meaning/ [Accessed 3 Mar. 2020].

Market Realist. (2019). Understanding a Bank's Operational and Business Risks. [online] Available at: https://articles2.marketrealist.com/2019/10/understanding-a-banks-operational-and-business-risks/# [Accessed 3 Mar. 2020].

Murphy, C.B. (n.d.). Why Investors and Credit Card Holders Need to Know Counterparty Risk. [online] Investopedia. Available at: https://www.investopedia.com/terms/c/counterpartyrisk.asp [Accessed 3 Mar. 2020].

PRINCE2.wiki. (2017). Risk: PRINCE2 wiki. [online] Available at: https://prince2.wiki/theme/risk/ [Accessed 8 Sep. 2019].

SearchCompliance. (2019). What is risk management? - Definition from WhatIs.com. [online] Available at: https://searchcompliance.techtarget.com/definition/risk-management [Accessed 12 Mar. 2019].

Singh, D. (2005). Basel Committee on Banking Supervision: Compliance and the compliance function in banks. Journal of Banking Regulation, [online] 6(4), pp.298-300. Available at: https://www.bis.org/publ/bcbs113.pdf [Accessed 28 Aug. 2019].

Sneha Sultania (2018). 11 Major Risks Faced by Banks in 2018 and Beyond. [online] MEDICI. Available at: https://gomedici.com/risks-in-the-banking-industry-faced-by-every-bank [Accessed 21 Sep. 2019].

The Economic Times. (2019). Definition of Risk Management | What is Risk Management ? Risk Management Meaning - The Economic Times. [online] Available at: https://economictimes.indiatimes.com/definition/risk-management [Accessed 3 Apr. 2019].

Tursoy and Tursoy, T. (2018). Munich Personal RePEc Archive Risk management process in banking industry RISK MANAGEMENT PROCESS IN BANKING INDUSTRY. [online] Available at: https://mpra.ub.uni-muenchen.de/86427/1/MPRA_paper_86427.pdf.

Www.bis.org. (2022). CRE51 - Counterparty credit risk overview. [online] Available at: https://www.bis.org/basel_framework/chapter/CRE/51.htm?tldate=20220101&inforce=20220101 [Accessed 3 Mar. 2020].

Www.nbs.rs. (2019). NBS | Risk Management in Banking. [online] Available at: https://www.nbs.rs/internet/english/55/55_6/index.html [Accessed 4 Jun. 2019].