Internal organisation of risk control and management in a bank with large international operations

Transacting interest rate and foreign exchange products with customers and banks expose a bank to fluctuations in market rates. The author demonstrates how the risk implications of such exposures can be measured and how an internal control system has to be designed and implemented in order to protect a bank against serious losses. The development of trading organisations in banks in the last ten years shows a clear trend towards risk orientation. Furthermore globalisation and complex financial products require a high level of technical and mathematical skills for risk managers. The focus is on processes of managing and controlling market risk. The ability to quantify market risk is a prerequisite for risk management and risk control. Much research remains to be done in this area. Nevertheless, applying the right pragmatic approaches allows a bank to set up an effective risk control organisation. Risk control is not only a methodological challenge, its implementation also requires significant education on all hierarchical levels and may very well affect the way the overall trading business is managed. The information provided by risk control leads to further decisions being taken by senior management (e.g. defining the maximum market risk that a firm is willing to take). Such decisions require close co-operation between risk control and top management. Some of the control functions are to be included in the operations area (especially in settlements and financial control). Besides segregation of duties, a quality-oriented design of the processes in operations and well-trained personnel play an important role in a trading organisation.