Abstract
M.Comm.
The aim of this study was to take a closer look at the modem financial institutions of the
world and to determine what adverse conditions these companies face. Banks are some of the
strongest organisations in a country, and the banking sector is a major employer. Yet, the
risks faced by banks are enormous, and without the prudent and responsible management of
these risks banks can find themselves in severe trouble. Recent situations in the South
African banking sector underpin this, as several of the small banks in the country went into
judicial management or were put out of business because they failed to meet their liquidity
requirements.
Risk management in banking is one of the most important tasks in the institution. Regardless
of the division or type of operation, banks face certain risks. In this study, the researcher
looked at the risks described in the literature as the main risks found in the banking
environment. Solvency, liquidity, credit, price and operating risks are the risks most
commonly discussed in the literature on banking risks.
Although the five main risks constitute a serious threat to a bank each in its own right, each
risk can be subdivided based on the likelihood of the risk materialising. The researcher
therefore subdivided each major risk into subrisks. The question was then posed: Are there
any similarities between these risks? The researcher developed a model whereby risks are
categorised according to the attributes they have in common. The study classified the risks
into the categories of market, credit and other risks.
The objective in classifYing known banking risks is to assist the risk management team in a
bank to manage similar risks in a similar way. Instead of focussing on each major risk and its
multitude of subcategories individually, it is easier to manag~ a set of risks according to their
similarities.
Furthermore, the researcher wanted to determine which all the banking risks discussed
would be universal in the danger they hold to any banking operation or any division
operating within a bank. The question was posed: What are the classical risks in banking
that would without a doubt lead to bank failure ifleft unmanaged? Liquidity, solvency and
credit risks were the risks identified as critical in any banking operation and the risks that
history has shown to be most detrimental to the future viability of any bank.
Finally, the study looked at the management of these three classical risks from the perspective
of determining policy and strategy. The study drew form literature, personal observation and
the input of risk and bank management professionals to highlight some ofthe most important
elements in credit, solvency and liquidity management.