Market Risk Essay Example | Topics and Well Written Essays - 2000 words - 1

Market Risk - Essay Example The purpose of risk management is to reduce the impact of different risks related to a purpose. It may be caused by risks posed by the environment, technology, organization or politics. But in financial management, risks can be managed using traded financial instruments and therefore there is a need to understand the importance of fundamentals in risk management. Governor Randal S. Kroszner, speaking before the American Bankers Association, Spring Summit Meeting in Washington, D. C. held on March 11, 2008, spelled out the importance of fundamentals in risk management. He stressed that there are fundamental issues that must be addressed by financial institutions in the light of economic disruptions and points out to sound risk management practices. Governor Kroszner cited an example as one of failures of bank’s policy is risk concentration, and cited an example of â€Å"putting all eggs in one basket†, and that by concentration, he said, â€Å"losses could occur at one time.† Gov. Kroszner noted that as concentration of banks to its functions of basic lending, holding of securities, trading of complex instruments, providing liquidity instruments, engaging in off-balance sheet transactions and other financial activities, banks are treading on a new market where there are information and unidentified data which form hidden risks, and manifests its presence only during times of problems. An example, Gov. Krozzner said, is the market- wide demand for liquidity experienced by US recently. (Governor  Randall S. Kroszner, 2008) In governance, information is the key for control and this lies in the hands of senior management who are entrusted to do this function. Gov. Kroszner stated why information is important link taking into consideration recent events in the US.. He said that when information is kept â€Å"in silo† and not distributed â€Å"vertically and horizontally within firms† a segregation prevents managers from