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Risk management is a term that can be applied to many aspects of business, but on a fundamental level it involves protecting a company from negative events.

For example:

The insurance industry uses the term to broadly describe services and products corporate and business clients use to protect themselves from potential losses.

In corporate Information Technology departments, risk managers are charged with insuring the business can continue to function normally in the event of computer system failure, terrorist attack or natural disaster.

In the banking sector, risk managers strive to make sure a bank isn't overexposed to plummeting stock markets or other financial pressures that will jeopardize the strength of its balance sheet.

Banking executives try to manage three principal risks as defined by a series of international agreements known as the Basel Accords. These are a set of recommendations on banking laws and regulations promulgated by the Basel Committee on Banking Supervision, which is part of the Bank of International Settlements based in Basel, Switzerland. Central bank representatives from the Group of 10 nations are members. Although the committee can only advise, most member countries implement its recommendations through national laws.

Of course, there can be a gap between when recommendations are made and when they are actually implemented by member countries. Nonetheless, there's widespread agreement that banks need to protect themselves against certain specific types of risks.

First there's market risk, also known as systemic risk. This is the hazard that a whole group of traded financial products such as stocks, bonds, or commodities will fall in value simultaneously. Market risk is caused by outside events, such as rising oil prices, terrorist bombs, earthquakes or sudden hikes in interest rates.

Credit risk is the risk a particular company or individual will default on its obligation to repay its debts. Credit risk is becoming increasingly more complex as new credit derivative products allow banks to trade the risk a company will fail to repay a loan. This means a major default could ripple through the banking sector and impact more than just the original lender. If the customer defaults on loan repayments, whoever bought the credit default swap has to repay the remainder to the bank.

Operational risk is the risk something might go wrong in the day-to-day running of a bank, while reputational risk - sometimes considered a sub-sector of operational risk - is the risk that something will happen to damage a firm's reputation. Following a succession of financial scandals, such as the collapse of Enron and the accounting problems at MCI Worldcom, banks are increasingly sensitive to reputation management.

Roles and Career Paths

People who work in market risk are typically situated on or close to the trading floor. Market risk specialists use mathematical value-at-risk (VaR) models to work out the maximum amount of money their bank would lose in the case of a particular event. They also work closely with traders to calculate the risk associated with specific transactions.

Professionals in credit risk analyze company balance sheets and meet with directors to determine the organization's financial health. By comparison, operational risk experts review the likelihood of particular events taking place and formulate plans in case they do.

Reputational risk specialists attempt to present the bank's best side in public. Few banks employ reputational risk specialists per se - the role is typically dealt with by Public Relations, Human Resources, or the legal team.

If you want a career in risk management, it's a good idea to join a bank's graduate training program. At some banks, risk management training is covered by the IT or operations department. However, Deutsche Bank and UBS are among those offering risk-specific training to graduates. The Risk Management Association also offers various training and accreditation programs.

Skills and Qualities

- Analytical ability and statistical aptitude
- Strong skills in mathematics and finance
- Good problem-solving and decision-making abilities
- An understanding of the bigger picture