Banking Risk Management:
Banks must manage risk more objectively, using quantitative
skills to understand portfolio data and to predict portfolio per-
formance. As a result, risk management will become more pro-
cess-oriented and less dependent on individuals.
Norman McClave (1996, 15)
Banking risk management is both a philosophical and an operational issue. As a philosophical issue, banking risk management is about attitudes toward risk and the payoff associated with it, and strategies in dealing with them. As an operational issue, risk management is about the identification and classification of banking risks, and methods and procedures to measure, monitor, and control them. Actually, the two approaches are not independent from one another. Attitudes toward risk shape up the guidelines for risk measurement, monitoring, and control.
An overview of banking risk management, this chapter is in two sections. The first section is a discussion of the philosophical approach to risk management, while the second section is a discussion of the operational approach to risk management.