Kaplan And Mike's Risk Management Framework

Introduction

To explain the Risk Management Framework outlined by Kaplan & Mike, and to appreciate its relevance in modern banking requires a balanced view, illustrating the alternative and current practice that is in use throughout most of the world. It is the author’s intent to show that existing best practices are not sufficient to identify and determine management risks fully and to explore this theory in depth, this paper is composed of two sections:

1. An explanation of Risk Management with existing Risk Management Frameworks using Basel iii guidelines as an example and,

2.

• An explanation of Operational Risk and Market Risk,

• An explanation of Kaplan & Mikes Risk Management Framework highlighting how biases are detrimental and counter-productive

In essence, the more exposure to risk a bank has, the more capital requirement is needed in order to offset the losses that may be incurred from financial or economic stress. As such, Basel iii is the regulatory standard accepted worldwide on capital adequacy and market liquidity risk. Stress testing also falls under the authority of Basel iii. The three pillars as set out in Basel iii, Minimum Capital Requirement, (this is the pin on which Kaplan & Mike make their argument as it deals directly with credit risk, operational risk and market risk), Supervisor Review Process (which provides better tools than those available in Basel i & ii and deal with different types of risk- systemic, pension, concentration, strategic, reputational, liquidity & legal, and intends to ensure that financial institutions have adequate resources and capital to cover all the risks that may occur in their business) and thirdly Market Discipline which sees banks disclosing their capital structure i.e. tier I and tier

Applying Kaplan and Mike’s Framework in a marketing capacity in a bank

All banks should develop a robust well informed strategy to manage Market Risk. Firstly is the bank’s ability to accurately identify and determine the level of market risk it is prepared to take on. The level of tolerance for risk should then be equal to, or less than the total amount of market risk capital set aside by the bank. Once the level of tolerance has been agreed, the bank will need to align its business goals with that of its market risk appetite.

As mentioned earlier, geopolitical, environmental, economic or competitive changes can influence the market and these must be considered in any Market Risk model while taking into account the expertise the institution has (either internally or through a panel of experts), to realise a profit in specific markets and whether or not it has the ability to identify and monitor or control the risk in these