In investment banking, risk management is an essential practice. Management of risks means prioritising the risks on an asset, recognising what kind of risk it is, and assessing how it can be managed.
Since the outcomes are uncertain, the post-assessment session is followed by a coordinated effort to lessen the impact of failure. At the same time, it has to be a cost-effective solution.
This way, an investment banker ensures that resources are optimised enough to reduce the risk, lessening it to almost zero value. They monitor the asset in such a manner that they manage the likelihood and increase the probability of success.
What the art and the science of risk management are all about?
Investment banking has always been a risky field. Thus, the whole sector has been built on risk management.
You can take a calculated risk when investing money into an asset or a company. You need to be extremely calculative about handling the risk, and you should be able to mark the right time to exit.
Simply said, the risk needs to be managed effectively to increase the probability of success in investment banking. In other words, if you can completely eradicate, evade and suspend risks to minimise the detrimental effects, you can maximise your success percentage. These are some techniques you will be taught when you learn investment banking.
Risks investment banking institutions face
An investment bank invests in several securities in different markets. Here are some of the risks they are prone to:
Market risk
These are the most common risks that are unavoidable. This is why risks associated with the market are one of the biggest concerns for investment banks worldwide. These risks comprise the losses due to various factors because of the variables that exist in the market. Some examples are inflation, exchange values of the country’s currency, inflation, and interest rate risk.
External risk factors
These are called credit risks, which are external factors. Credit risks occur mainly when an investment banking organisation fulfils the intermediary role for over-the-counter trades.
These risks come into effect if the transaction counterparty becomes a payment defaulter. This can also happen if the client fails to pay the principal or the interest after receiving financing from a bank or lending institution finance. To manage such risks, the banks should run a rigorous loan eligibility process where a qualified and reliable candidate should get the fund offering.
Principles of risk management
The risk management principles apply to every walk of life. Not only just business or investment banking but any activity with some speculative element to it could also use these risk management principles.
Overall, there are three principles of risk management. They are also helpful in understanding the drivers of risk management. They are as follows:
- Identifying and tracking the risks which have been emerging
- Development of strategies that can efficiently mitigate the risks
- Supporting corporate strategy and improving the decision-making process
Identifying and tracking emerging risks involves finding out the risks that are up-and-coming and could affect the investment strategy of a large financial corporation.
The Strategy development for risk mitigation is obviously the measures they take to minimise the risk. The Corporate strategy and enhancement of the decision-making process is the organisational protocol to manage the risks.
Therefore, they should also improve their practices and focus on increasing their safety net by identifying the key priorities for the next year, 2023 and starting afresh. Also, they find out the areas which could aid their profitability to cushion all the adverse effects.
The legal and compliance work should also be completed, as focusing on these will eliminate unwanted risks. The leaders of financial agencies must also learn to prioritise developing additional capabilities for efficient risk management. This way, every organisation or institution is prepared to meet all kinds of evolving risks.
This was one of the few topics that will be taught you in Imarticus Learning’s investment banking courses after graduation. You will also learn the nitty-gritty of investment banking from the best faculty in India. After completing the course, you can also get placement with the top companies in India.
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