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Even though many intellectuals held that deregulation, poor supervision, lack of liquidity, casino banking, and Gaussian copulas are some of the factors that caused the financial crisis, failure to view the crisis from a multilateral perspective further heightened the situation. This is evident from the roles that international governments like the International Monetary Fund (IMF) and the European Union (EU) play.
Therefore, risk management within the banking industry did not have to stop within the UK. In addition, managing the risks ought not to have been left solely to the bank employees and management. For proper risk mitigation, all stakeholders ought to have learnt all the possible risks that may occur in the sector. In this line, the financial institutions would have distributed the risk to all the stakeholders.
Instilling financial literacy in stakeholders only could have been a positive move towards risk management strategies. On the other hand, some risks are extremely complex, thus may require the attention of expertise or technocrats. This may be absent in some stakeholder, hence making collaboration difficult.
Having been used in the implementation of Basel II Accord, collaboration allows specialists to devise their own risk management approaches (Who was responsible for the financial crisis? n.d.). With this nature of approach to risk management, all stakeholders need to acquire basic financial literacy. Notably, creating a network of risk managers eliminates unknown risks, popularly referred to as Black swans.
Moreover, the network enables individuals to question assumptions in the risk management process, avoid overreliance and belief on models, as well as impart skills to distinguish between predictable and unpredictable risks. For proper risk governance, individuals must interrogate the validity of the rules put forward for implementation; this eliminates instances of failure in managing risks.
Banks might have had limited resources to recognise the extent of the financial risks. The involvement of many players in the management systems of banks makes it out rightly difficult to blame banks for the financial crisis. The intertwined system makes it difficult for banks to act outside the outlined frameworks.
To manage such financial crises effectively in future, there is need for wider responsibility using the concept of knowledge supervision. Therefore, the United Kingdom’s government and international governments are also to blame for the failure of risk governance.
They ought to have involved expertise in the entire process, as well as trained all stakeholders on financial literacy (Who was responsible for the financial crisis? n.d.). In essence, risk management requires a collective approach to avoid massive financial catastrophes.
Risk Management Process
The consequences of the financial crisis have made banks and other financial institutions to employ stringent measures of managing risks. However, the stern measures lacked strong implementation forces, as well as a centralised point to coordinate the entire process. Risk identification and categorisation use modelling, brainstorming, interviews, and analysis of project plans and different scenarios as key methods.
After identification of risks, evaluation and ranking occurs in order to prioritise risks for management and effective allocation of resources in any sector. Under risk management, there are four key stages irrespective of the sector of application. Risk awareness, assessment, evaluation, and absorption are the four stages of managing any form of threat.
In the banking industry, risk management remains the best option to curtail possible financial scarcity. If the banks could have understood the liquidity issues and the need for effective regulation, they could have put up necessary measures to curb the eventual financial meltdown. From the manner in which the banks dealt with the situation, it is evident that lack of unrivalled coordination was absent.
Under risk awareness, identification of possible risks that can affect the banking industry is examined. After proper risk awareness or identification, it becomes easy to assess all the sources of such risks. In this stage, each risk receives a specific assessment procedure to ascertain its level of influence in case it occurs.
The uncertainty perspective approach is the most preferable approach in the risk identification segment given that it does not only determine all possible sources of threats, but determines also all possible sources of positive risks or opportunities.
With increasing changes in the banking industry, there are always unrelenting follow-ups and frequent updating of the identification lists as per the knowledge and comprehension of the business atmosphere. If the approach could have been applied, the financial crisis could not have occurred.
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Risk assessment helps firms to group risks according to their severity. The process helps financial strategists to prioritise risks as per their occurrence probability, as well as address uncertainty through effective decision-making.
After risk assessment, vivid evaluation and estimation in terms of the probability of occurrence and consequence take place. Here, a clear comprehension on the major effects of the risks on the operations of financial institutions is imperative. Evaluation and ranking occurs in order to prioritise risks for management and effective allocation of resources.
The financial institutions ought to have evaluated all possible causes of financial crises, as this would have made it possible for the sector to absorb all the risks, which led the country to one of the worst financial crisis. In risk analysis within the banking industry, remedies like holding greater amounts of capital reserves in terms of liquidated assets could have minimised the extent of the crisis.
Notably, the entire risk management process requires the inclusion of several numbers of actors; the actors should have sufficient skills in financial operations. This could have ensured that there is complete accountability and authority, shared responsibility, interdependence, and coordination of government’s roles.
Shareholders, customers, government, and SMEs have close tie with banks; these stakeholders ought to have adequate knowledge on bank operations in order to be in a position to avert such disasters (Who was responsible for the financial crisis? n.d.). In the case of stakeholders, there are voluntary and involuntary groups.
For instance, the government can set boundaries for its financial institutions to follow in their operations. This did not occur at the time of the crisis. Since no single stakeholder can provide knowledgeable supervision on banking risks, the entire group of stakeholders ought to have taken full initiative of providing supervisory duties to the banking industry.
Moreover, a systematic approach to managing risk as opposed to event-focused approach works well for the banking industry, as the former involves monitoring of signals, making use of existing knowledge, instead of searching for the unpredictable aspects.
Even though financial institutions had put in place some risk management strategies to curb the crisis, less was done to move the whole process to completion. This made the risk management process ineffective, thus failing to address the crisis.
In essence, the government’s coordination role, shared responsibility, interdependence, and authority versus accountability are the basic principles in controlling the occurrence of financial shocks in an economy. International governments and financial institutions, such as banks have to understand that financial literacy has to cut across the masses in order to support risk governance using both the old and new models.
Since the society establishes the boundary of bank operations, it remains vital that knowledge supervision should be part of the society and those within the banking industry. The crisis required a collective approach to avert its massive effects on other sectors of the economy.
Who was responsible for the financial crisis? n.d..