QUESTION 1

Risk Management in the Banking Industry

The chain of events that led to the global economic crisis will affect banking industry. The resulting global economic downturn led to a vicious cycle of companies failing or downsizing, thus leading to unemployment, which further reduced demand for goods and services. In addition, banks across the globe retrenched and in place of the liberal lending practices credit tightened across the board. Governments stepped in with fiscal supportthe likes of which has never been seen in modern recorded history. And now, everyone waits to see what will happen with this never-before-tried experiment of flooding the world markets with government money.

The core business of a bank is to manage risk and provide a return to shareholders in line with the accepted risk profile. The credit crisis and ensuing global recession seem to indicate that the banking sector has failed to tend to its core business. If it had done so effectively, then credit default swaps would not have been bought up with so much eagerness.

The framework for risk management in a bank is fundamentally no different today than it was prior to the credit crunch and recession. Indeed, the risk function lacks a certain business acumen, and continues to be considered a handbrake on growth. Chief economists and their macro perspectives are still divorced from the banks own strategy function. We believe that a return to managing risksnot ignoring them or believing they can be passed offis the cure for the ailment that has hit the economy so hard.

Based on the article above, Illustrate the tenets of risk management should be implemented in banking industry?