Risk management seems to be on the minds of everyone these days, especially with what the banking industry has experienced over the past year. With such history, there is no surprise that risk management is changing, and the risks involved in risk management are rising. So, in order to help you understand these changes, here are some of the emerging trends in risk management.
First of all, liquidity risk management has taken the forefront in risk management plans. Liquidity issues can especially be seen within the technology and financial parts of most businesses. Within liquidity risk, there are three main areas:
- Funding
- Market
- Co
unter-party driven
Funding Risks - Funding risk means that your business does not have enough cash to run a project or the business. This is a huge worry for anyone within risk management. If you don’t have enough funds, you cannot do something as small as finish a project or, on a larger scale, even stay in business. Funding liquidity risk can affect how well your organization operates. It has definitely become a major risk management priority within any risk management plan.
Market Risks - Market risk usually comes in the form of items within a portfolio, items that can't ever be sold, or products that can't be sold in the market for their stated worth. For example, the housing market would fall under this emerging risk management trend. Banks have had houses in their portfolios that were supposed to be a worth a certain amount. When the market crashed, these houses lost their value and could not be sold for the bank's investment. Consequently, within the housing crisis, if these houses did sell, they sold for a lower market-value and investment price.
The market affected the valuations of these assets. Now, banks must come up with risk management plans to deal with this crisis in case the market changes in the future. This may mean that banks, traders, and money managers may have to avoid risks like this altogether. This is something that they will have to consider in their emerging change management plans.
Counter-party Risks - Counter-party risk can almost be considered consumer-driven in many cases. For example, if your client stops paying you for something that they’ve bought, they have not fulfilled their obligations to you. To continue with the housing market example, people who stopped paying their mortgage became a counter-party liquidity risk. Now, companies are considering what type of risk management plan can be put in place to deal with people or companies who default on loans, credit card debt, and other financial obligations.
With all the recent crisis of late, companies have had to really consider these emerging risk management trends and implement risk policies. It has to become part of their overall business strategy in order to thrive in the new and more challenging environments of today.