Business lines

A bank or fund is usually the sum total of several business lines. Each of these business lines has an associated risk to its assets that Basel II wishes to label Beta or Gamma. The total risk exposure can be summed as the total of the risk-weighted assets. Thus, best practice in one department does not mean it translates into a bank’s best practice.
We have defined the risk appetite to risk offer relationship in another line of our Loss Database that evolves into a Basel II compliant system. A standard-certified risk-taking bank will have higher regulatory capital assigned because its risk management processes and system are adequate, but not extremely sophisticated. An advanced-certified risk-taking bank will have lower regulatory capital allocated because its risk management is highly developed and is evaluated as a lower overall risk. The risk of losses increases, and this should be reflected in the Beta or Gamma risk weight.
The long-term investors can almost be in danger of extinction under the rush of the incoming speculators. More traditional wealth-creation business lines involving “hard” assets and less turnover or “churn” attract lower comparative costs and risk.
Moreover, under the advances of the Internet and online dealing, we have the increased presence of naive traders in the jungle. For such a public, there are a score of animals that can seek to prey upon such victims; smart operators, banks and brokers can play the role of scavengers. These people may be naive gamblers, even more tempted by margin trading and buying highly leveraged derivatives contracts, even with borrowed money. Thus, there is little in the way of risk management to protect us – a fool and his money are easily parted. There are other methods in risk management for the investors from the traditional ones offered, they are:

• risk avoidance
• risk retention
• risk reduction (e.g. diversification)
• risk hedging
• transfer of risk.

Maybe fund managers and bank professionals have too much information at times. It is a mess and too much to process efficiently. Everyone is perennially too busy. They do not have enough useful data to make the best investment decisions. Risk management is partly the presentation of useful and readable information, then the translation into action and concrete risk countermeasures. So, in the absence of a clear solution, they take Occam’s Razor for a business decision. Stated very simply, if there are two or more choices, then the simpler and better option is likely to be one that offers the least line of resistance. Thus, when confused, call in the experts and dump the problem (or risk) on them.