In all nations of the world. The
private investors are prone to various kinds of risks, which require prompt and
adequate management. Risks that arise in the
course of business which owners should be able to control, to include, amongst
others, credit risk, liquidity risk, reputation risk, legal risk, operational
risk,
customer satisfaction risk, leadership risk and information technology
risk. On the other hand, the risk that are exogenous to the investors which
tend to pose the greatest control problem towards investors regulatory risk,
industry risk, government policies risk. Sovereign risk and market risk. Other
important risks, as added by Umoh (2002), include competition risk, human
resources risk and fraud risk. For the purpose of this study, only four of
those types of risks shall be considered, and they are:
Legal Risk:
This is the risk that contracts are not legally enforceable or documented
correctly
Interest Risk:
This is a loss (to a bank) arising from changes in the level of interest rates.
Inflation Risk:
This arises from changes in the price level. It is one of the greatest risks
facing the nation now due to rapid changes in the price level.
Operational Risk: This is the risk of direct and indirect loss resulting from inadequate
or failed internal processes, people and systems, r external threats.
Liquidity Risk:
Liquidity risk is the risk that the investor will be unable to meet its
financial commitments to customers or markets when due.
Market Risk:
Market risk is the risk to a owernere financial condition resulting from
adverse movements in the market prices.
Reputational Risk: There is no doubt that trust and confidence are crucial factors and the
change or probability that the public may lose the trust and confidence in a
banking institution constitutes reputations risk.
Human Resources Risk-
This is the risk that a owner may not
have adequate human resources in terms of number, qualification and experience
to pursue its mandate.
Risk Management Approach:-
§ The fundamental pillars of banks
credit risk management systems are its credit rating systems for ranking its
customer and the self-assessment system.
§ A self-assessment of the assets of
the banks must be concluded at a regularly determined interval.
§ Information on the funds gap. The
market environment and other matters related to liquidity risk must be reported
by all units in charge of managing banks cash flow to the risk management
department.
§ Banks must establish the operations
department to be in overall charge of operations risks management.
Risk Assessment Measure:-
§ Risk assessment is a step in a risk
management procedure. It is the determination of quantitative or qualitative
value of risk. Risk management is the identification assessment and
prioritization of risks.
Risk assessment/risk evaluation requires
that risks be measured according to likelihood of occurrence and value. Its
measurement entails incorporating risk into investment analysis which can be
done using the following statistical methods;
§ Expected returns: Involves the
estimation of each investment life and returns expected each year. That returns
will come depends on probability because of risk and the probability can be
quantified on a 0.00 to 1.00 scale. The probability of 0.00 indicates that the
event will not occur, whereas 1.0 probability indicated cash flows that can
occur and their expected values.
Coefficient of variation which is
this standard deviation of the probability distribution by its expected value.
This is a relative measure of risk.
Examples of bank’s formal risk assessment
techniques and measurements are:
i. Concitional value at risk cVaR used
by portfolio managers to reduce the likelihood of incurring large losses;
ii. Loan-to-value Ratio: used by mortgage
lenders to evaluate the risk of lending funds to purchase a particular
property.
iii. Credit analysis: used by lenders to
analyze a potential clients financial data to determine whether to lend money
and if so, how much and at what interest rate
iv. Benchmarking of risk management
v. Use of key performance indicators
(KPI)
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