Contemporary Issues In Finance

Risks have become a central part of operations of business organisations. Companies need to analyse both internal and external environments to recognise the risks present and determine an effective way through which they can be resolved (Embrechts and Hofert, 2014). Following is an ICAAP report for Aldermore a new challenger bank.

Risk management is a very important aspect of operations of Aldermore. The company’s focus apart, from providing better banking services and customer satisfaction, is on minimising the risks (Murphy, 2011). Treating Customers Fairly principles have always been given the highest priority by Aldermore. The bank offers high-quality banking products and services to the customers, to ensure that their demands are fulfilled. This way the company aims at reducing the chances of risks. In this regard, the bank heavily relies on using various principles and risk management techniques (Aebi, Sabato and Schmid, 2012).

One of the primary risks for the bank is the market risk. Fluctuations, inflation, etc. have a significant impact on the performance of the banking organisation. If proper steps are not taken to mitigate them, then they can have a negative impact on the functioning of the banking organisation and may even jeopardise its very existence (Mikes, 2011). The modern day banking and financial environment are highly unstable, due to which the instances of market failure, economic crisis, etc. are very high. In order to mitigate these risks, the Aldermore bank’s management focuses on reviewing and analysing operations policies. Herein they closely analyse every aspect of the bank’s operations and compares them with trends in the market. On the basis of such information, they are able to closely study the market and identify any risks that might have a negative impact on its operations (Haldane and May, 2011).

In addition to this, the bank also strictly regulates its functions and policies. This way it attempts at studying and analysing different aspects of its operations. Such thorough regulation of own operations enables the bank to reduce the risks and mitigate them. In this regard, the aspect of strictly regulating the operations and performance provides the bank with an opportunity to learn more about its internal environment and analyse how it reacts to market trends and changes. Such information helps the managers in taking appropriate decisions. For instance, strictly regulating the operations entails that the bank will try to avoid any uncertain situation and will try to ensure that the risks are identified, and ways to mitigate them are implemented.

Risks and banking operations go hand in hand. This can be observed in the case of Aldermore bank as well (Akhtar, Ali and Sadaqat, 2011). Even though the bank uses some very strict measures and control techniques to manage its performance and reduce the risks, then as well there are numerous risks and threats that the bank has to overcome on a daily basis. Currently, the majority of risk management function lies with the Board members. They are tasked with the responsibility of identifying, assessing and controlling risks faced by the banking organisation. On this basis, it can be said that the board members’ input is vital to the overall effectiveness of the risk management function (Cornett, Strahan and Tehranian, 2011). Through the business model, it is clear that the bank is well-versed and proficient in relation to managing the credit risks. However, even then credit risk is the biggest risk faced by the banking organisation. Herein if the level of unemployment rises and the customers are unable to fulfil their financial obligations with the bank, then this will have a severe impact on its operations as well as the ability to manage and reduce the risks (Cornett, Strahan and Tehranian, 2011). In the current uncertain environment, the likelihood of such a risk is very high (Lehmann and Hofmann, 2010). The risk appetite of the bank is lower. This is due to the reason that the firm operates on a small scale and has a very limited customer base.

However, with the increasing use and dependency on computerised systems, the managers can accurately gauge and test the market conditions (Haldane and May, 2011). Such methods provide management accurate and reliable information about the market as well as the customer(s). Access to such detailed information enables the managers to take accurate and reliable decisions, thereby minimising risks such as credit risk by a great margin. Through such a system, the management is able to get a better and effective understanding of the market (Abu Hussain and Al-Ajmi, 2012). In this regard, the management can also obtain knowledge about trends prevailing in the industry. On the basis of such information, they can alter or modify the business functions and thus fulfil the goals and objectives of the bank along with reducing the risks.

The risk mitigation methods used by the bank have proved to be very effective. They have provided the firm with a platform to learn more about the target market and its environment (Weber, Scholz and Michalik, 2010). On the basis of information gained through such analysis, the bank develops policies and systems to manage its operations effectively and in the process mitigate the risks. Primarily the bank uses the three lines of defence model to manage and reduce the risks. Herein the first defence is regarding managing the operations and business processes effectively. This entails reducing the number of useless and inefficient functions so that the overall quality of operations of the bank can be improved. This way the firm is able to control the business functions (Mikes, 2011) largely. As the second line of defence, the bank uses a wide variety of risk management tools and methods. The third line of defence requires using strict and heavy internal control audit. This provides managers with the ability to analyse the firm’s functions and decisions. Through such information, it becomes simpler for the authorities to take proper decisions and also ensure that the bank’s risks are controlled and properly mitigated (Embrechts and Hofert, 2014).

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REFERENCES

• Abu Hussain, H. and Al-Ajmi, J., 2012. Risk management practices of conventional and Islamic banks in Bahrain. The Journal of Risk Finance, 13(3), pp.215-239.
• Aebi, V., Sabato, G. and Schmid, M., 2012. Risk management, corporate governance, and bank performance in the financial crisis. Journal of Banking & Finance, 36(12), pp.3213-3226.
• Akhtar, M.F., Ali, K. and Sadaqat, S., 2011. Liquidity risk management: a comparative study between conventional and Islamic banks of Pakistan. Interdisciplinary Journal of Research in Business, 1(1), pp.35-44.
• Cornett, M.M., Strahan, P.E. and Tehranian, H., 2011. Liquidity risk management and credit supply in the financial crisis. Journal of Financial Economics, 101(2), pp.297-312.
• Embrechts, P. and Hofert, M., 2014. Statistics and quantitative risk management for banking and insurance. Annual Review of Statistics and Its Application, 1, pp.493-514.
• Haldane, A.G. and May, R.M., 2011. Systemic risk in banking ecosystems. Nature, 469(7330), p.351.
• Lehmann, A.P. and Hofmann, D.M., 2010. Lessons learned from the financial crisis for risk management: Contrasting developments in insurance and banking. The Geneva Papers on Risk and Insurance-Issues and Practice, 35(1), pp.63-78.
• Mikes, A., 2011. From counting risk to making risk count: Boundary-work in risk management. Accounting, organizations and society, 36(4-5), pp.226-245.
• Murphy, M.E., 2011. Assuring responsible risk management in banking: The corporate governance dimension. Del. J. Corp. L., 36, p.121.
• Weber, O., Scholz, R.W. and Michalik, G., 2010. Incorporating sustainability criteria into credit risk management. Business strategy and the environment, 19(1), pp.39-50.