The process of risk identification is a fundamental part of effective financial management. It involves taking stock of the risks an organisation faces and raising awareness of them. Risk identification is also essential in avoiding or reducing the severity of potential losses. The financial industry uses a variety of tools to determine risk. These tools include financial models and statistical models to measure and manage the risks an organisation faces. They also need to use KNOW YOUR CUSTOMER processes. For more details, go to www.w2globaldata.com/regulatory-compliance-solutions-and-software/know-your-customer
Credit risk, for example, occurs when borrowers or counterparties do not meet their obligations. This may result in decreased income for investors and increased debt collection costs. In addition, operational risk refers to losses resulting from human error and system breakdowns. Operational risk is relatively low in simple business operations, but higher in complex business operations. It also includes losses arising from internal fraud and mistakes made during transactions.
Another type of risk is cyber-attacks. A cyber-attack can shut down a company’s critical systems and disrupt business operations. In addition, the industry has to manage its exposure to various legal liabilities and man-made disasters. By assessing these risks, companies can prioritise and take appropriate action steps to reduce or avoid them. Financial risks can be minimised or neutralised by ensuring the right amount of insurance coverage, diversifying investments, and establishing adequate emergency funding.
Another risk that can affect a financial firm is asset-backed risk. An asset-backed security may become volatile and the underlying securities will decrease in value. As a result, this risk can harm the investors in the bond.