Different companies have different risk exposures, and their risk management approach is customized to the type of risk the company is exposed to.

Consider the case of Trident Bank & Trust.

Trident Bank & Trust (TB&T) is a large financial institution whose deposits and loans are received and made across seven states in the western United States. With deposits in excess of $1.5 billion, 1,258 branch offices, and 1,769 kiosks in shopping malls and grocery stores in the United States, along with correspondent and operational relationships with all the top-20 Asian and European banks, TB&T is considered to be one of the strongest financial institutions in the western United States.

Ralph Thomas, TB&T’s chief risk officer (CRO), has the responsibility of preparing and overseeing TB&T’s risk management strategy and monitoring its implementation. In preparing for his presentation and question-and-answer session during the company’s annual shareholders’ meeting, his staff assembled the statements that appear in the following table. Help Mr. Thomas prepare for the meeting by indicating whether each of the following statements is true or false.

Statement	True	False
One risk facing TB&T is the potential for a countrywide—or even worse, worldwide—recession, which would reduce both the demand for loans and volume of funds held on deposit by the bank’s customers.
In addition to the direct impact of interest rate changes on the value of the bank’s assets, liabilities, and equity securities, interest rate changes will also affect the profitability and financial soundness of the bank through their effect on the demand for loans and the default risk of the bank’s borrowers. These effects make it particularly important that the bank manage these interest rate risks.
Because so many of the risks facing TB&T are derived from sources outside the bank’s control, there are no effective methods that the bank can use to manage these risks. As a result, financial institutions, such as TB&T, do not need to engage in risk management.
One way to estimate the possible financial consequences of rising interest rates and employee wages on TB&T’s profitability is to use spreadsheets and what-if scenario analyses.