29Jul

Association between Governance and risk Management

 Association between Governance and risk Management
 
Currently, there are many studies available on the associationbetween corporate governance as well as risk management in financial institutions. Tarraf and Majeske (2008, p. 1) claimed that policies of theshort run, as well as the long-term risk management forfinancial institutions, differ inversely based on the reliability of individual governancestructures. Laeven and Levin (2009, p. 263 - 267) contributed by investigatingabout the underlying rationalesfor risk managementbased on the financial institution's governance structure such as banks. Therefore,risk management remains essential in evasion of new financialcrisis.

Accordingto Kanchu and Kumar (2013, p. 148), credit risk involves the possibilitythat the individualswho borrow from the bank fallshort of fulfilling the obligations on established terms. Often, there is a possibility for the loanee to fail to act with respectto the stated terms of credit advancementhence leading to credit risk to lenders.These could assume either the formabsolute or, losses that involve variations in portfolio value due to real or alleged decline in credit quality characterizedby an alarming number of non-payments. Credit risk is intrinsicto the transactions entailing borrowing and lending money to business activities related intimately to market risk factors.Kanchu and Kumar (2013, p. 148-151) further explained that the aim of the credit risk operation is to lessen the risk as well as optimize the rate of risk stipulated by the bank called risk-adjusted return. The objectiveis achievable through makingan assumption as well as keeping credit accessibilitywithin the legal parameters. The following aspectsare important in credit risk management: measurementby credit scoring, quantification by approximation of future loan losses andsetting of prices on the basis of science. Besides, the last aspect is controlling by useful Loan Review technique as well as portfolio management (Kanchu & Kumar, 2013, p. 148-151).

Based on Altunbas, Manganelli & Marques-Ibanez (2011, p. 14) views on the third financial crisis, many latest researches have narrowed down on the factors affecting performance through the utilization of stock marketdata and information associated with major banks.For instance, the banks that havegreater Tier 1 capital as well as the biggerloan to entire assets ratio. It is evidentthat these banksthrived more compared to the performanceof first phases of banks during the financialcrisis. On the other hand, Altunbas et al.(2011, p. 14-15) adds that banks that have highershareholder-friendly management performeddismally. A higher bank deposit level, as well as greater liquidassets, was related to greater returns. Furthermore,banks that have excellent internal risk regulations alsoperformed better, whereas the effectof corporate governance appeared uncertain.

 
 
 
 


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