Risk Management Model
You have been tasked to design the risk management plan that includes risk treatment options and needs to cover the construction operations phases of the project.
The following report deals with the risk management process of a particular organization. The report is based on the risk management program of Bank X which has plans to establish and start its operations in Australia. The report introduces the readers with a variety of different risks that are involved in the operation of such a large project (Waemustafa and Sukri 2016). The report has used a five scale risk management framework that starts with the identification of the key risks at disposal and ends with the ways to mitigate the risks accordingly.
- Identification of the key risks- The following part of the report discusses the key system risks that are The individual risks have been identified and segmented into specific risk categories that helps to deal with the risks in a proper and systematic way (Gale and Yorulmazer 2016). The more the project progresses, the more is the chance of the formation of complex risks. The main purpose of the identification of the key risks is to assess them and make necessary mitigation plans to counter them.
- Risk Mitigation and allocation strategies- The following part of the report discusses the initial strategies that are taken for the mitigation of the risks. Each of the single risks are unique and harmful in nature and thus they have to be mitigated accordingly as early as possible (De Anglo and Stulz 2015). The strategies include the likes of the procurement contracting, delivery strategies and that of associated risk transfer.
- Risk Management and Processes- The risk management plans and processes part deals with the risks involved throughout the HSR system’s life cycle.
The risk management process of the authority involves the likes of five of the key steps that are needed to be implemented to reduce the chances of the risks that occur in the lifecycle of the project. These are shown in the diagram provided below;
Figure 1: Risk Management Process
Source: (Gale and Yorulmazer 2016)
It is important for every business organization to identify and implement a solid risk management model to make sure the business can avoid risks and progress smoothly with its operations in the market. The banks are no odd ones out as the management of each and every bank has to create a specific risk management model to ensure that they do not slip in the market. Bank X which has been planning to enter the market of Australia must also plan a similar risk management model to get rid of the different forms of risk and establish their supremacy in the market. The management of Bank X will be following a 5 step risk management model to make an entry into the Australian Banking sector. The five step risk management plan will involve five different steps namely;
- Risk Identification- The risk identification process will be involving the management of Bank X to measure the risks and identify their impact before the establishment of their business in Australia. It is an essential part of the business management to make an analysis of the risk that the bank may face in the market.
- Qualitative Risk Analysis- The qualitative risk analysis of the business will involve the calculation of the risks, their impacts on the bank and the amount of damage that they can make to the business. The risk analysis of the business will thus help the organization to have a clear and predefined idea of the market in advance which will help them to fix the strategies of the business accordingly in Australia.
- Quantitative Risk Assessment- The risks related to the different interest rates, lending rates, loan rates and other risks from different interests are quantitative risks. The Australian banking sector follows a federal principle and thus the bank has to take the risks on their own (De Anglo and Stulz 2014).
- Risk Response Planning- As mentioned earlier the measurement of the risks and the differences in the calculation of the risks has to be done in accordance and adequate action from the part of the management needs to be taken to ensure the success of the bank in Australia. Different credit risks, operational risks must be tackled accordingly to ensure the smooth operations of the banks.
- Monitoring and control of the risk- The management of Bank X has to establish different strategies and principles to tackle the risks that will be identified by the bank before their establishment in Australia (De Anglo and Stulz 2014). Apart from this the company has to also establish a new risk management team that can formulate different types of risk management plans and mitigate the risks accordingly.
The particular risk management model has been selected by Bank X as because the five step risk model provides the necessary support and balance to the management of Bank X for providing a proper and efficient risk management plan that will be helpful for them to make a dynamic entry into the Australian market (Chance and Brooks 2015). Apart from this the mentioned model provides the fluidity and the dynamic ability to the business to mitigate all risks and bring success to the banking operations in Australia.
The fives step risk management model will be integrated by the management of Bank X in an organized process to ensure the success of the business in the market;
- Strategic Objectives decomposition- The risk management team of Bank X has to identify the risks and then break them down into different segments and transform them into tactical or operational Key Performance Indicators. The formulation of the different kinds of Key performance indicators will help the organization to mitigate the risks.
- Identification of the factors associated with uncertainty- The factors that are associated with uncertainty must be highlighted to take cover from any types of risks that may be associated with such.
- Performance of Risk analysis- The risk analysis of the organization should be performed in a proper and efficient way to make sure that the tools are used for the in depth analysis and the identification of all the risks that are associated with the operations and sustainability of the mentioned bank in Australia.
- Turning the analysis into solid actions- The risk analysis reports must be taken seriously and immediate actions must be taken by the concerned team to mitigate the risks accordingly and establish a proper risk management plan to ensure a sustainable future for the business.
Reason for selecting the particular Risk Management Model
Risks in banking sector may be defined as the “possibility of loss”. This can be both financial loss and loss to the image or reputation. Like the other commercial organizations banks also tend to take considerable risks which is quite inherent in any forms of business. The management of Bank X has to make sure that the organization has to take risks to make a grand entry into the Australian market. The banks may take a number of different risks that may seem too risky. However taking such steps of great risks can ensure maximum success for the bank in the future. Some of the main risks that Bank X may face and their sources are as follows;
- Credit Risk- Credit Risk occurs at the time when the borrowers of the bank and some other counterparties refuse to pay the borrowed amount to the individuals or any group. In doing so, the parties also fail to fulfill the contractual obligations (Chance and Brooks 2015). The main financial risk of Bank X is credit risk and most of them arise in the bank’s lending operations. The bank is sometimes also exposed to credit risks that arise from the treasury activities of the bank. The bank will always be open to such a risk no matter of its well diversified portfolio.
- Market Risk- The bank defines the market risk as the risk of valuation loss or the reduction in the expected earnings of the bank. This may happen due to the adverse fluctuations in the exchange rates of the country, different rates of interest and cross country currency basis spreads. The management of Bank X must make sure to obtain cost efficient funding that may come from a vast range of sources (Bessis 2015).
- Liquidity Risk- Liquidity risk is defined by the management of Bank X as the risk of incurring losses just because of the incapability of the bank to meet the payment obligations to the lenders in a timely and proper manner when the amount becomes due. The management of Bank X aims to make sure that they do not incur the liquidity risk as such a risk can hamper the future of the bank in the island continent.
- Risk from other competitors- The presence of other competitors in the market is always a risk for the business like that of banks. The presence of Commonwealth bank of Australia and other local and international banks is a great risk for the Bank X. The popularity of the other banks and the market share will be hard to achieve for the mentioned bank.
The traditional practices and concepts in the banking sector are being slowly discontinued and new practices and trends are slowly being followed to gain success in the modern banking market. Some of the latest trends and their impacts on the banks are as follows;
- Regulations will continue to broaden- The changing times in the banking and the increasing risks that are being associated with the banks, there awaits more new regulations that are both financial as well as non financial (Bessis 2015). The regulatory frameworks generally come into existence because of the fraudulent means of wasting money or any big scandals related to the loss of public money from the banks. The regulatory frameworks are now strong enough mainly due to the financial crisis of 2008. The financial crisis has forced both the private as well as the public sector banks of the developed economies to strengthen and also secure their financial economy.
- Rise in the customer expectations- The vast technological innovation have changed the way people thought a decade earlier. The technological innovation in the financial sectors has ushered in a new set of competitors for the banks who are ready to offer the customers with digital based financial solutions. The customers naturally are more prone to shift their loyalty to such institutions and thus expect their banks to match such kind of advanced services to usher in a new revolution in the banking sector and make the banking more favorable for the customers.
- New forms of Banking- As said earlier the introduction of the latest technological innovations has changed the way people thought about banks. The ushering of the latest forms of technology has paved the way for a digital revolution within the banks (Berger et al. 2016). This includes the likes of the use of Big data, Machine learning, online banking, mobile banking, crowd sourcing and many more as such.
- New forms of risk- New forms of advanced and untraceable risks are creating havoc in the banking industry. The new risks are smart enough and cannot be mitigated without expert technology. Some of the risks include Model Risks, Cyber security Risks, Contagion Risks and many more as such.
The management of Bank X must follow some basic principles to avoid the risks that can damage their future business planning’s for Australia. Some of them are as follows;
- Implement stronger protection against lending- The implementation of stronger rules and regulations can help the bank to avoid any form of risks that may occur from lending money to institutions or public in general.
- Establish new and friendly policies and products- The bank can introduce attractive products that are unique in nature and will have an immediate impact on the customers. Such an offer can ensure a tough fight in the Australian market and will help the Bank to claim some amount of market share in the beginning.
- Embracing Technology- Technological adoptions are one of the latest and best things that can be used to establish supremacy in the market. The adoption of technological reforms will help the organization to gain considerable market share
References
Berger, A.N., Bouwman, C.H., Kick, T. and Schaeck, K., 2016. Bank liquidity creation following regulatory interventions and capital support. Journal of Financial Intermediation, 26, pp.115-141.
Bessis, J., 2015. Risk management in banking. John Wiley & Sons.
Chance, D.M. and Brooks, R., 2015. Introduction to derivatives and risk management. Cengage Learning.
De Anglo, H. and Stulz, R., 2014. Liquid-Claim Production, Risk Management, and Bank Capital Structure: Why High Leverage is Optimal for Banks.
DeAngelo, H. and Stulz, R.M., 2014. Liquid-claim production, risk management, and bank capital structure: why high leverage is optimal for banks.
DeAngelo, H. and Stulz, R.M., 2015. Liquid-claim production, risk management, and bank capital structure: Why high leverage is optimal for banks. Journal of Financial Economics, 116(2), pp.219-236.
Gale, D.M. and Yorulmazer, T., 2016. Bank Capital Structure, Fire Sales, and the Social Value of Deposits.
Haq, M., Hu, D., Faff, R. and Pathan, S., 2017. New evidence on national culture and bank capital structure. Pacific-Basin Finance Journal.
Hugonnier, J. and Morellec, E., 2017. Bank capital, liquid reserves, and insolvency risk. Journal of Financial Economics, 125(2), pp.266-285.
McNeil, A.J., Frey, R. and Embrechts, P., 2015. Quantitative risk management: Concepts, techniques and tools. Princeton university press.
Stulz, R.M., 2015. Risk?taking and risk management by banks. Journal of Applied Corporate Finance, 27(1), pp.8-18.
Waemustafa, W. and Sukri, S., 2016. Systematic and unsystematic risk determinants of liquidity risk between Islamic and conventional banks.
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