financialtreat – will explain the Types of Risk Management in Investment Banking which you will get in the following article. let’s look at this article carefully!
Risk management in investment banking – Since Indonesians look at financial literacy, they have begun to understand the importance of investing. Especially during a pandemic that has successfully opened our eyes to the need to implement effective financial management to deal with unexpected events. One of them is through investment.
However, apart from the various benefits, it is undeniable that there is risk management in investment banking that you need to know. Before you start, it’s time for you to understand the various risks of mutual funds, bond risks, stock investment risks, and other investment instrument risks.
Why Do We Need to Invest?
Investment is an activity to manage finances with the aim of multiplying money or increasing wealth. The types of investments are also very diverse, ranging from gold investments, mutual funds, deposits, bonds, stocks, property, etc. Whatever instrument you choose, it is very important to know the risks of investing before starting.
Although there are investment risks, this financial management activity also contains benefits that cannot be ignored. Among them:
- Ensuring a better financial future
- Investment assets can generate profits to be used as fixed income
- Minimize the risk of being in debt because it prioritizes setting aside money for savings or investment
- Avoid the risk of financial stress
- Family life will be more financially secure in the future
Investment is an important long-term financial plan for building a financial future. Therefore, even though there is an investment risk, you need to allocate income to reap profits from investing.
Types of Risk management in investment banking
In Risk Management, MNC Bank uses quantitative and qualitative risk measurement methodologies. Although the types of risks that exist in banking are quite broad and diverse, MNC Bank categorizes 8 (eight) types of risks as follows:
Credit Risk is a risk that occurs due to the failure of other parties to fulfill obligations to the Bank. It can originate from various business activities of the Bank such as lending (in some banks it is the main / largest risk), securities, acceptance, interbank transactions, trade finance transactions, exchange rate and derivative transactions as well as commitment and contingency obligations.
The purpose of Credit Risk Management is to ensure that the Bank’s Fund Provision activities are not exposed to Credit Risk that may cause losses to the Bank.
Market Risk is the risk to balance sheet positions and administrative accounts including derivative transactions due to overall changes in market conditions, including the risk of changes in option prices.
It’s Risk includes, among others, interest rate risk, exchange rate risk, equity risk and commodity risk. Interest rate risk, exchange rate risk, and commodity risk can come from both trading book positions and banking book positions. The main objective of Market Risk Management is to minimize the possible negative impact due to changes in market conditions on the Bank’s assets and capitalization.
Liquidity Risk is the risk resulting from the Bank’s inability to meet maturing obligations from cash flow funding sources and/or from high-quality liquid assets that can be collateralized, without disrupting the Bank’s activities and financial condition.
The main objective of Liquidity Risk Management is to maintain the Bank’s ability to fulfill its funding obligations and to maintain the Bank’s ability to continuously enter into market transactions (ensuring the Bank’s funding sources).
Operational Risk means risk caused by inadequacy and/or malfunction of internal processes, human error, system failure, and/or external factors affecting the Bank’s operations. It can cause direct or indirect financial losses, namely potential losses for lost profit opportunities.
The main objective of Operational Risk Management is to minimize the possible negative impact of internal process malfunctions, human error, system failures, and/or external events.
Legal Risk is a risk caused by weaknesses in juridical aspects, among others, due to lawsuits, the absence of laws and regulations that support the Bank’s activities or products, or engagement weaknesses such as non-fulfillment of legal contract conditions and imperfect collateral binding.
The main objective of Legal Risk Management is to ensure that the Risk Management process can minimize the possibility of negative impacts from juridical weaknesses, absence and/or changes in laws and regulations, and litigation processes.
Strategic Risk is a risk caused by, among others, the determination and implementation of the Bank’s strategy and inappropriate business decision making or the Bank’s lack of responsiveness to external changes.
The main objective of Strategic Risk Management is to ensure that the Risk Management process can minimize the possible negative impact of inaccurate strategic decision making and failure to anticipate changes in the business environment.
Compliance Risk is the risk that occurs due to the Bank not complying with and/or not implementing the applicable laws and regulations. In practice, Compliance Risk is attached to all types of risks inherent in the Bank’s business activities, especially the Bank’s main risks. Namely Credit Risk, Market, Liquidity Risk, and Operational Risk.
The main objective of Compliance Risk Management is to ensure that the Risk Management process can minimize financial losses caused by, among others, fines/penalties and non-financial losses, including limitations in the Bank’s business development, as well as Legal Risk and Reputation Risk.
Reputation Risk is the risk due to a decrease in the level of stakeholder trust which is caused by. Among others, negative publications related to the Bank’s business activities or negative perceptions of the Bank.
The main objective of Reputation Risk Management is to anticipate and minimize the impact of financial and non-financial losses from Bank Reputation Risk. Reputation Risk is difficult to quantify because a single mistake can destroy a Bank’s reputation that has been built over the years.
How to Overcome Risk management in investment banking?
The profit or return and risk of investment are interrelated. If the return is large, then the risk will be higher. Conversely, if your investment return is small, then the risk faced will be lower. In order for these risks to be overcome or minimized, do the following three ways:
Determining Investment Targets
Before investing, you can find out many things by setting a target first. Start by determining the desired investment period as Well. As the type of investment and the type of risk you can face. For example, if you want to invest short-term with minimal risk, choose mutual funds.
This investment instrument is also suitable for novice investors. If you already understand the various markets and types of investments, you can move on to higher risk.
Routinely Supervise Investment
After doing the tips above. The next way to overcome investment risks is to be in full control of the investments you make. You can do this by monitoring investment movements regularly. The goal is that you will not miss an interesting opportunity to get higher profits. You can also find out when the investment trend is down. In essence, you can find out the dynamics of investment to minimize risk.
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Beware of Scams
Not a few investors are entangled in fraudulent investments. To avoid these scams. Make sure you know whether the financial institution or company you want to invest in already has clear legality. No less important is that the company must have official licenses from Bappebti and the Financial Services Authority (OJK). This also applies to investment managers, Custodian Banks, and realtors.
Despite the existing investment risks, investing has become an important financial post. That’s why whatever your income, set aside to meet the investment post.
Well, so that investment capital and other financial items are well managed, it’s time to switch to Bank Raya. By using Raya financial features such as Saku Raya. You will no longer have trouble managing important financial items effectively and efficiently. Anyway, managing finances will be easier, safer, and more fun. Well, that was a little explanation related to Risk management in investment banking. Hope it is useful.