Seminar Report-Dr. D H Fung.Reports Accounting, Finance, SPSS Essay

Seminar Report-Dr. D H Fung
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Organizations around the globe are established with the primary objective of realizing substantial amounts in return from their investments. As such, the owners or members of management in these organizations usually have the responsibility of identifying various avenues and platforms to capitalize and make profits while meeting consumer needs, tastes and preferences. It is essential to note that in light of increased competition in the business landscape, the only organizations that are exhibiting immense growth, productivity and profitability are those that regularly step aside from their comfort zone and take various business-related risks. From the business perspective, high risk opportunities tend to realize the greatest returns and vice versa. Financial institutions such as banks are among the organizations that are continuously involved in taking risks with the hope of reaping huge profits in return. Banks for instance, lend money to people and individuals in some cases without any forms of security or collateral attached to the loans. While banks usually charge high interest rates during such scenarios, they are left exposed because the loans could easily be defaulted and consequently, they fail to recover the funds advanced. Based on that fact, risk management is an essential concept that should be embraced by all financial institutions. The paper will be an examination of a report by Dr. D H Fung that was provided during a seminar that highlighted extensively on the concept of financial risk management with the objective of expounding on ways the ideas and findings could develop more insights of financial markets and their overall application in personal practice.
Part One- Summary of the Ideas, Theories and Observations put forth by Dr. D. H. Fung in the Seminar Financial Risk Management: A Regulator’s Perspective
Dr. D.H Fung conducted on an extensive seminar early during the year on financial risk management. The primary objective of the seminar was to assist banks and other financial institutions learn how to control and manage risks according to the figure below.
Figure 1
The speaker acknowledged that risk taking is a major characteristic in many banks. However, it is vital that these financial institutions find ways to balance between the levels of risks that they are willing to take in relation to the desirable amounts of return they want to achieve. As such, Fung (2020) shared that “An effective risk management that is commensurate with the size and complexity of its operations needs to be in place to help ensure that the risks undertaken are well managed within the bank’s risk appetite and that it achieves the intended results”. From the above statement, risks can be equated to losses and as therefore, banks and financial institutions should take risks that won’t destroy their entire operations. The only way that they can achieve that is through effective risk management. Fung also shared that poor risk management was one of the factors that led to the Asian financial crisis.
The seminar also covered risk management framework of financial institutions as shown in the figure 2 below. According to the speaker, they also serve as the basic elements of a sound risk management environment (Fung, 2020). The Board of Directors in any bank is usually mandated and obligated to oversee the risk management of the organization. It succeeds in doing so through the establishment of special committees including the risk management committee. The BOD of a bank also ensures that there are adequate policies to manage and mitigate different aspects of risk. The senior management in financial institutions oversees daily risk management through ensuring effective coordination of different units including the compliance unit. The seminar also shared that an internal audit unit is vital and responsible for independent checking of risks in the financial institutions.
Figure 2
The seminar also addressed risk limits of financial institutions. It covered the market risk policy and shared that banks only engage in derivative trading only on behalf of customers. It also shared that banks and financial organizations usually have stringent credit risk policies (Fung, 2020). For instance, banks don’t usually advance loans for speculative purposes. Similarly, banks strive to provide loans to different sectors in the economy and consequently, diversify risk. On the same scope of credit risk diversification, financial institutions, have a limit that ensures that lending to a particular sector doesn’t exceed 10% of the total loans. In that regard, the speaker went further to highlight some risk measurement methods. These include value at risk in the case of market risk and % of total non-performing loans against total loans for credit risk. Banks also employed the sensitivity analysis otherwise known as stress test in the determination of interest rate risk.
The seminar report also shares inputs concerning the evolution of the banking supervisory approach. It noted that conventionally it was regulation-oriented before transforming into capital-based supervision (Fung, 2020). Currently, banks and financial institutions are engaged in risk-based supervision that has its highs and lows. As such, the speaker shared that it was imperative to identify the step. Considering that the past approaches were passive and plagued with many challenges, it is highly recommended that the next phase of banking supervisory is interactive. Nonetheless, the Fung expounded on the current risk-based supervisory approach. According to Fung (2020), Banking business is becoming very complex, banks need to establish adequate risk management systems and internal controls to identify, measure, monitor and manage the risks that they face”. Based on the above statement, Fung shared that it was vital that banks put in place risk management systems and identify relevant risks before launching new products or business. In that regard, regulatory bodies are advised to focus not only on the quantity of risks faced by banks but also the quality of systems that have been put in place to manage risk. As such, some of the risks that have been identified by bank regulators in relation to the risk-based supervision approach include credit, interest rate, market, liquidity, operational, reputational, legal and strategic risks.
Additionally, the seminar report by Fung also covered three distinct ways that banks use to manage the different types of risks shared above. The first method is hedging which involves taking an offsetting position in a related security to reduce the risk of adverse price movements. The second measure is diversification and is characterized by the purchase of large amounts of independent purchases by investors (Fung, 2020). Through diversification as a method of managing risk, Fung highlighted on the concepts of systematic and unsystematic risk that together make up total risk as shown in figure 3 below. Fung recommended that to avoid concentration risk, people should strive to invest in a large portfolio of independent assets. Similarly, according to facts in the seminar report, Fung suggests that investing in many items of the same amount can significantly assist in mitigating investment risk.
Figure 3
The last method of risk management is insurance that entails the “equitable transfer of the risk of a loss, from one entity to another in exchange for payment” (Fung, 2020). Furthermore, Fung delved further to expound on the efficient frontier theory which he suggests is vital in finance and investment. The theory is built on two principles that assist financial institutions in the management of investment risk. First, it assists banks to select assets with the highest rate of return from a particular group or assets with similar risks. Secondly, it also helps financial institutions to choose assets with the lowest risk from a group with similar rates of return. Lastly, the seminar also touched on sensitivity analysis as a means of risk management used by banks
Part Two-Discussions based on the Seminar from Dr. D.H. Fung
Dr. Fung raised some valid points and facts regarding risk management. It is undoubted that banks and financial institutions and highly exposed to various risk because of the nature of their business. Banks for instance, often advance loans to individual customers and organizations without receiving any form of security or collateral in return. In such circumstances, while these financial institutions benefit from the high interest rates they charge against the loans advanced, there is also a high chance of the loans being defaulted and consequently, failure to collect the principal amounts provided. Based on the above fact, risk management decisions such as the one shared above have been identified as some of the primary reasons for failure of banks around the globe (Bengtsson, 2014). The sentiment ...