Towards the end of his tenure as President, Bush administration chose a young staff named Neel T. Kashkari to head the $700 billion U.S Government Troubled Asset Relief Program also termed as bail out program popularly. This raised many eye brows since he did not have more than six years of financial experience in total and the task he was assigned with was suppose to take care troubled US economy, troubled to a scale which had never seen in the history.  People’s skepticism about Neel’s experience was understandable because task was humongous and his appointment sounded very unusual based upon his level of experience and also because he started as scientist at NASA.  What many people missed was since he joined Treasury in 2006 he was examining the consequences of economic housing fallout; indirectly he was studying what to do if there is major financial crisis. In the current economic scenario Financial Risk Management has never become so crucial; the financial meltdown means big opportunity for risk managers.

    Financial risk management is the practice of creating economic value in a firm by using financial instruments to manage exposure to risks like credit and market risks. Against popular belief risk management procedures are never meant to completely eliminate the risk but how to handle them when it arise. It requires identification of sources of the financial risk, measuring it and plans to address them. It primarily focuses on how to hedge financial instruments to manage costly exposure to risk. It includes monitoring of risk taking activities, policies and procedures relevant to risk activities, and distributing risk related reports. Usually firms combine financial risk management with insurance purchasing and contingency planning into single unit called enterprise risk management. Company’s forms risk management department headed by chief risk officer who reports to risk oversight committee.

    Financial risks can be categorized into three risks categories. They are market risks, credit risks and operational risks. As the name suggests market risk is the risk that the value of an investment will decrease due to moves in market factors like equity risk, interest rate risk, currency risk and commodity risk. Credit risk is the risk of loss due to debtor’s non-payment of a loan or other line of credit, current mortgage crisis may fall under credit risk. And operational risk is a risk arising from execution of a company’s business function and it also includes fraud and legal risks etc.

    So how enterprise does manages these risks? There are several guidelines which could act as guiding principles for managing these risks. Like initially allocate minimal funding to a new initiative but ensure that board members, senior management or other supervisors are involved.  This will not only ensure proper use of funds but also increase productivity. We can also plan a financial risk management strategy that involves no technology so that participants could focus more on procedures of enacting financial risk management. Once the risk management procedures are in place we should decide where technology can be used to make these procedures more effective. In the current challenging economic times firms must balance risk with caution and the long-term interests of return to shareholders. In fact rivals are more than eager to share the sensitive risk management information with each other as lenders try to minimize the damage caused by debtor’s default, fraud and other hazards. International banking industry is working to create working methods of reporting risk which are common to all the companies in an effort to enhance the risk management procedures. The global Risk Analysis Services has observed that number of participants has increased by 25% in the last year or so indicating that awareness about risk management procedures are increasing and everyone is willing to go extra mile in this regard. Financial institutions are introducing standard methods for reporting risk and calculate probable gain or losses if a particular risk actually happens.

    Like any other management policy and procedures Risk management methods involve may cause hindrance to actual business. For example experts are expecting that after the current fallouts and bailouts there will be a deluge of regulation in near future. The other side of the story is good news for risk management professionals because all these regulations would require risk management professionals which will increase their demands.