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A banking institution should apply sound management principles to its entire spectrum of risks. Failure to establish a management structure that adequately identifies, measures, monitors, and controls the risks involved in an institution's various products and lines of business has long been considered unsafe and unsound conduct. These risks include, but are not limited to, credit, market, liquidity, operational, legal, and reputational risk.
A banking institution will face risks during every stage of its life cycle. Regulators place great emphasis on the institution's management of the types of risk described below. See Supervisory Letters SR-97-24 and SR-97-25 for more information.
In practice, an institution's business activities present various combinations and concentrations of these risks depending on the nature and scope of the particular activity. Regulators pay close attention to the quality of bank management's formal or informal systems for identifying, measuring, and containing these risks.
When evaluating the quality of risk management as part of the evaluation of the overall quality of management, regulators consider the following elements of a sound risk-management system:
Adequate risk-management programs can vary considerably in sophistication, depending on the size and complexity of the banking organization and the level of risk that it accepts. For smaller institutions engaged solely in traditional banking activities and whose senior managers and directors are actively involved in the details of day-to-day operations, relatively basic risk-management systems may be adequate. However, large, multinational organizations will require far more elaborate and formal risk management systems to address their broader and typically more complex range of financial activities and to provide senior managers and directors with the information they need to monitor and direct day-to-day activities. In addition to the banking organization's market and credit risks, risk-management systems should encompass the organization's trust and fiduciary activities, including investment advisory services, mutual funds, and securities lending.
For more information on risk management, see the Commercial Bank Examination Manual.