Introduction
Banking system is characterized by a number of peculiarities that define it as a powerful and properly organized system with abilities to be developed constantly. Considering recent financial disasters in bother financial and non-financial firms all over the world, it is very important for each bank to take care of their own systems and management. Current banks have already faced with various types of risks that usually lead to negative effects on the developing business. This is why risk management has to be considered as one of the most significant bank operation that usually aims at identification of possible threat, in-time development of measurement and assessments, and concretization of objectives in order to minimize the level of negative consequences. In this paper, the analysis of two banks and their risk management will be given: Banco Popular Español S.A. with its abilities to take care of liquidity, credit, and other risks and the Saudi Investment Bank with its possibility to be an integral competitive part in the world market.
Brief History of Banks
Banco Popular Español S.A. Nowadays, Banco Popular Español S.A. takes the third place in the Spanish banking group. The success of this international bank may be explained by the devotion that is demonstrated by its founders and employers and the desire to provide people with reliable services, to save people’s money, and to become a good and fair partner with other systems. In 1926, Banco Popular Español S.A. was founded, and in the middle of the 20th century, several representative offices were opened in different countries (not only in Spain). Within a short period of time, this bank becomes able to offer different commercial services to its potential consumers. To improve the work and achieve better results and recognition, the division of business took place, and four major segments have been identified. Main activities of Banco Popular Español S.A. are concentrated in such countries as Spain, Portugal, and the United States of American; in each country, there are more than 15,000 employees, and revenues reach approximately $6,000 million annually.
The Saudi Investment Bank. The Saudi Investment Bank (SAIB) has been established as a joint stock organization in the middle of 1976. However, first operations were carried out by the Bank in March 1977. Within a short period of time, the activities of this Bank have been recognized in many countries all over the world: perfect money market, safe currency options, and foreign exchange. Due to reliable retail services, almost all regions of the Saudi Arabia except the south one were eager to spread the offered network and promote the development of banking services on high levels. The success of the operations provided may be proved by means of incomes that are reported annually. For example, in July, 2008, it was stated that incomes of SAIB almost reached $800 million.
Peculiarities of Risk Management
The two banks under consideration are in the risk business because the vast majority of financial services offered by these banks usually assume different kinds of financial risks. To succeed in the chosen industry, it is obligatory for managers to take reliable risk measures in order to connect capital and activities and present the most appropriate risk ratios. The major benefits of risk management in banking are the possibility to deeper understanding of approaches and models, to make use of lessons taken from numerous economic downturns, and to predict possible results. Among the variety of risk management types, it is possible to underline liquidity risk, credit risk, market risk, investment risk, and operational risk. Each type has its own peculiarities for the banks under analysis; and it is obligatory to define both similarities and differences of risk management in Banco Popular Español S.A. and SAIB.
Credit Risk in Banco Popular Español S.A. and SAIB
Credit risk in all banks is connected to the negative effects of financial operations between the bank and the client (the borrower). In other words, credit risk management aims at preventing the situation if the borrower fails to meet the obligations set in the contract with a bank. Banco Popular Español S.A. tries to control the risks in a sophisticated manner by means of proper monitoring of credit exposures and maintaining minimum equity in order to be able to over such credit risks. In its turn, SAIB improves its scoring measurements because this kind of risk is still the most serious and dangerous for the bank. Borrower concentration influences considerably the profits of the Saudi Bank, this is why it is obligatory to decrease the level of customer deposits and change the ratios (74% in 2008 and 55% in 2009).
Liquidity Risk in Banco Popular Español S.A. and SAIB
Liquidity risk is connected to the bank’s inability to meet its duties and obligations set by the contract because of some unpredictable obstacles. The group of expert in Banco Popular Español S.A. has to control bank’s liquidity to ensure its clients with reliable services and future. The chosen activities are the organization of an internal limit for calls, maturity of assets and their liabilities, and evaluation of liquidity gap. The results of their operations are positive indeed: money market results are improved in €6,000 million and capital market achievements are estimated in €590 million. SAIB suffers from of liquidity risks because numerous market disruptions and usual credit downgrades. To overcome challenges, SAID maintains a deposit equal to 7% in 2008 and to 4% in 2009. And reserves of more than 20% have to be liquid.
Market Risk in Banco Popular Español S.A. and SAIB
In both Banco Popular Español S.A. and SAIB, market risk is characterized by the fair value that may fluctuate because of changes of variables in market. These variables are commission or foreign exchange rates, and even equity prices. If risk is caused by variations of the interests rates (that is a usual problem), the two banks try to improve net interests revenue by means of liability aggregates distribution. However, the main different is that the international bank uses the balance sheet to simulate different scenarios inherent to interest rate, and the Saudi bank takes care of commission sensitivity of assets and exposes commission rates as frequent as possible to be recognized. In general, the idea of market risk management by means of interest rates and commissions seems to be powerful and rather winning for both banks.
Operational Risk in Banco Popular Español S.A. and SAIB
Operational risk in banks is associated with all those problems caused by weak supervision, delivery, and processing information among the employees. Misinterpretation of accounts by the representatives of Banco Popular Español S.A. are usually motivated by new distribution channels and technological development. The representatives of SAIB make errors in transactions or ignore the obligatory regulations and frauds by the individuals. This is why operational risk management is an obligatory tool that has to control all transactions and other activities supported by the banks. In Banco Popular Español S.A., the operational risk map should cover the events and the analysis of causes of losses. By means of this tool, it is possible to quantify this type of risk and implement the necessary mitigation and other controlling systems. And SAIB focuses on the impairment of equity investments such as determination of decline in fair value or evaluation of normal volatility in order to change the already used technologies and improve operational flows.
Conclusion
In general, the evaluation of risk management of one of the Saudi Banks and one international bank shows that all types of banking systems usually face the same challenges. Their main difference is the ways chosen for the improvement of the situation. In case with the international bank, the representatives of Banco Popular Español S.A. demonstrate their sophisticated abilities to simulate and overcome challenges, and the Saudi Investment Bank has to implement as many reliable activities as possible to attract the attention of potential customers and prove that the chosen services and support are worthy of recognition. 2008 and 2009 were rather difficult for both banks because the world economical crisis and the necessity to control every single operation require certain time, awareness, and efforts. The fact that these banks continue working and cooperating with customers is the most powerful and evident that the chosen risk management from credit, liquidity, operational, and marketing perspective is successful and reliable to make use of it in future.