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Risk Management, Governance, Culture, and Risk Taking in Banks

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Risk Management, Governance, Culture, and Risk Taking in Banks

Federal Reserve Bank of New York,

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Banking is the art and science of transforming risk into profit.

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Recommendation

Regulators and consumers want banks to be safe, but banking is the art and science of juggling and transforming risk. Banks’ profits come from selecting the most lucrative and manageable risks. Without risk, there would be no need for banks, and you could leave your money under your mattress without concern. The real challenge lies in managing risk well, which is easier said than done, as this wide-ranging study by Professor René M. Stulz proves. getAbstract recommends his solid exploration of bank risk management to financial professionals.

Summary

A common understanding of risk connotes an exposure to danger, so if risks are dangerous, then prudent risk management should seek to minimize them. However, banks must assume some risks to earn a profit. Banks strive to maximize shareholder value, and taking on money-making opportunities is central to that mission. Whether they extend loans, write derivative contracts, make payments or trade foreign exchange, banks face some possibility of loss every day – sometimes enough to place them under “financial distress.” Proper risk management is not the reduction of risk but rather the maintenance of an intended...

About the Author

René M. Stulz is a finance professor at the Fisher College of Business at Ohio State University.

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