The Management of Risk
Risk management overlays all financial institution functions. Banks cannot generate the returns required by shareholders without accepting risk. The two key challenges for the management of banks and other financial service companies are how to manage and price that risk.
Buying the equivalent of an insurance policy can reduce many of these risks, but insurance bears a cost. Management has to balance the costs of those implicit or explicit insurance premiums against the level of protection afforded. A bank analyst has to understand enough about the techniques and tools available to make a judgment on whether management at a particular bank has the skills and infrastructure to make these decisions effectively. The starting point is to establish the organizational infrastructure for risk management.