There has been a severe global economic downturn in recent years. The banking crisis has affected nearly every market segment and everyone can feel the affects, from the under employed to the unemployed, from managing directors to financial consultants, and from college students to government workers. This has led to an increase in financial risks and an equal increase in concern over managing those risks.
Money is increasingly competitive and that money can be lost more easily through investments in a project, whether by a lower than expected return or the loss from not having the money to invest in another project yielding a greater return.
So financial risk management is the tool organizations, companies, and individuals use to minimize financial losses and optimize gains. Banks, both domestic and international, insurance companies, corporate and public clients, and asset managers all use financial risk management to successfully identify and limit risk.
A fundamental part of financial risk management is the creation of guidelines to be followed when considering investments for individuals or organizations. However, it is important to understand financial risk management does not define the kinds of risks that should be taken or even analyze risks. The focus is on providing proper guidance for decision making.
Proper financial risk management means clearly defined written policies through the office of the Chief Risk Officer, if there is one in-house, or from an outside consultant. These guidelines ensure better decision making by detailing compliance procedures.
Some areas of financial risk management are:
- Credit risk management
- Liquidity and market risk management
- Operational risk management
- Energy and commodity risk management
- Financial accounting risk management
- Insurance risk assessment
- Economic capital management
No matter what area of financial risk management is involved or what kind of organization it is, there is a need for truly independent analysis. This will avoid all conflicts of interest. While it is impossible to prepare for every conceivable financial risk, well developed procedures and guidelines can greatly mitigate possible risks.