RISK MANAGEMENT IN BANKING: THEORETICAL AND PRACTICAL ASPECTS

Abstract

The basis of bank risk management is the neutralization of their negative consequences for the bank'sactivity in the event of a possible risk event. At the same time, the bank’s costs of neutralizing the correspondingbanking risk should not exceed the amount of possible bank losses on it, even at the highest probability ofneutralizing their negative consequences in the event of a probable risk event. At the same time, the implementationof the relevant banking operation may be dictated by the requirements of the strategy and focus of banking activities.Management of risks initiated by banks can significantly strengthen the client position of banking managementand provide a synergistic effect of balancing the formation of qualitative characteristics of banking products. Theglobalization of financial markets, information technology development, and increasing competition have largelyaffected bank business and its risk management. Together with these forces, regulatory factors play a significant role.This chapter approaches bank risk management under the regulators’ perspective with an emphasis on the risk-basedcapital regulation. Specifically, how bank risk is regulated under the risk-based capital regulation and whether theregulation shapes bank risk are discussed in detail. In such a way, the chapter provides better understanding of therisk-based capital regulation and bank risk-taking behaviors.