TUTORIAL 1 – INTRO AND CONCEPTS
Q1. How does ‘risk’ differ from ‘uncertainty’? Discuss how this difference manifests itself in
the contemporary field of ‘risk management’ as compared with past practices.
Risk are the unknown outcomes whose odds of happening can be measured, while uncertainty
occurs when possible outcomes and probabilities are not known in advance.
In the past, banks accepted uncertainty and perceived it as part and parcel of banking business.
With the progression and developments, banks now are using their own risk management
function to assess and qualify risks more comprehensively and also take precautions to manage
the environment which has uncertainties.
Q2. Briefly define (in one sentence) and discuss the key features of each of the following risk
categories:
(a) Credit risk
Credit risk is defined as the potential that a borrower or counterparty will fail to meet
its obligations in accordance with agreed terms.
(b) Market risk
Market risk is the risk of losses in on-and off-balance sheet positions arising from
market prices movement.
(c) Operational risk
Under Basel II, it defines operational risk as the risk of loss resulting from inadequate
or failed internal processes, people and systems or from external events.
To which category does ‘climate risk’ belong?
Climate risk is belonging to non-financial risks category which are associated with
transactions that are non-financial in nature.
Q3. Among the objectives of risk management is to lower the cost of funds. Discuss how this is
attained.
By practice an effective risk management, an organization can improve their credit rating
by maintaining a strong track record of their timely payments and reducing the likelihood
of default. With a better credit rating, an organization can often access funds at lower
interest rates.
Besides, by involving meticulous financial planning and forecasting, the transparency and
accuracy of cash flows, revenue and expenses can lower the perceived risk and build trust
with lenders or investors. Subsequently, the cost of funds.
Q4. Based on Koh (2019a), p26ff, which is available in the library, discuss the following:
(a) Enterprise-wide/Integrated risk management
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This approach takes cognizance that the various risk categories such as credit, market,
operational and liquidity risk are interrelated rather than exist in isolation and should be
managed together rather than in isolated. By practising this approach, it would enable
the risk management function to adopt a bank-wide view of risk. For example, political
instability, trade war, natural disasters and pandemic which could lead to various risks.
(b) Risk models as decision-aiding rather than decision-making tools
There are some items that cannot be quantified and risk models can neither be static nor
perfect, therefore the risk models should be at best decision-aiding rather than decision-
making tools.
(c) It suggests a list of 23 indicators required for continuous risk management competency
development. Is this complete? Why or why not?
The list of 23 indicators are a framework which provide a basis to identify the risk
elements but it still not yet enough to cover all the potential risks that might be
happening as the risks are prone to changes. Therefore, a continuous research and
analysis shall be undertaken at all times.
Q5. Among the 11 risk management principles in ISO 31000 are “Principle 2 Risk management
is an integral part of all organizational processes”. Explain what this means.
Risk management is a process whereby organizations methodically address the risks
attached to their activities. A successful risk management initiative should be proportionate
to the level of risk in the organization, aligned with other corporate activities,
comprehensive in its scope, embedded into routine activities and dynamic by being
responsive to changing circumstances. The focus of risk management is the assessment of
significant risks and the implementation of suitable risk responses to achieve maximum
sustainable value from all the activities of the organization. Risk management enhances the
understanding of the potential upside and downside of the factors that can affect an
organization. It increases the probability of success and reduces both the probability of
failure and the level of uncertainty associated with achieving the objectives of the
organization.
