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Describe internal and external risk environment

Top 4 Risks in CBA

The Common Wealth bank of Australia is the leading bank which is capable of satisfying customer’s requirement. The bank was awarded with the highest customer satisfaction index. The analysis of the working structure of the bank, it has been focused that there are certain uncertainties associated with the functional and operational program of the organization which affects the smooth flow of processes. Risk is considered as whatever can make obstructions in the technique for the achievement of specific goals (CBA, 2017 b). There are various risks associated with the company process structure such as risks associated with interest rate, currency, import and export procedures, asset management, and others. It really is an operation that is continual in dynamics and supportive equipment in the essential leadership process (Maizatulakma et al, 2015).

According to Aula (2010), the CBA is looking forward for guaranteeing the lessening of the probability of dreadful happenings yet it also covers the extension in likeliness of occurring great things. In this paper we are going to focus on the risks associated with the working structure of the CBA and how those risks can be resolved which affects the functional program of the enterprise. The sources include online productions, catalogs, and diaries. Therefore, the top 4 risks identified in Commonwealth Bank of Australia (CBA) are in the table below:

Top Risks

Key Improvement Initiatives

Commodity risk

Insurance policy for customer deposits

Exchange rate risk

Hedging

IT system failure

Back up of the system in place

Skilled employee turnover

Periodic and mandatory training of employees

Table 1: Top 4 risks in CBA 

The following are the objectives of the study:

  1. To find the risks challenging Commonwealth Bank of Australia
  2. To hint out the system and procedure of risk management.
  3. To scrutinize the practices implemented by Commonwealth Bank of Australia for risk management 

In context of CBA policies, the organization cover the area of concern related to creating unusualness of banks„ business and the dynamic working condition, risk management has ended up being to a great degree basic, especially in the budgetary territory. Risk at the pinnacle level may be envisioned as the probability of a bank's budgetary prosperity being debilitated due to no less than one startling factors. While the parameters demonstrating the bank's prosperity may change from net premium edge to publicize estimation of value, the factor which can cause the basic are furthermore different. For instance, these could be default in repayment of advances by borrowers, change in the estimation of favorable circumstances or intrusion of the errand on account of reason like a mechanical disillusionment. While the underlying two factors may be named credit risk and market risk, generally, banks have all risks notwithstanding the credit risk and market risk as an operational risk (Ansgar and Diana, 2011).

In embraced exercises to help its targets, the Bank accepts various risks (Maimunah, Siti, and Roziah, 2015). Management of these risks is basic to all parts of the Bank's exercises and is the obligation of all staff. Directors have a specific obligation to assess their risk condition, set up fitting controls and guarantee that these controls are all around created and actualized viably. The Bank distinguishes, surveys and oversees risk at both a venture ('top-down') and business ('base up') level, a procedure that is liable to continuous audit. These risks are figured out how to a level that is steady with the Bank's risk hunger through procedures that accentuate the significance of respectability, a shrewd request, keeping up superb staff and open responsibility. The advancement and upkeep of a dynamic risk management culture that recognizes the requirement for cautious examination and management of risk in all business forms is an imperative goal of this structure. According to the COSO framework, the bank’s strategic policy for risk management is to hire an external auditor or consultant. This gives a strategic view of the CBA from ‘outside’. However, the bank trains its employees on operations and reporting. Compliance to the current regulatory standards is also part of the training package.

Objectives of the study

Risk management is the serious issue for the CBA to deploy effective functional program for increasing the satisfaction level of the customers (CBA, 2016). Late studies find that risk management is positioned by monetary officials as one of their most imperative destinations.' Given its certifiable noticeable quality, one may figure that the point of risk management would charge a lot of consideration from analysts in the back and that professionals would, along these lines, have an all-around created assemblage of shrewdness from which to attract defining supporting procedures. CSR initiatives have not yet been developed by the bank, therefore they are not consulting with the surrounding community (Aula, 2010).

To overcome the risk and to make managing an account limit well, there is a need to manage an extensive variety of risks identified with the bank. Risk management ends up one of the essential components of any saving money services risk management involves perceiving the risk and controlling them, infers keeping the risk at a commendable level. These levels differentiate from foundation to association and country to country. The fundamental focus of risk management is to accomplices; regard by boosting the advantage and enhancing the capital resources for ensuring the whole deal dissolvability of the saving money affiliation (Eyun?Jung and Linda, 2012).

It isn't that there are no stories to clarify why firms may wish to fence. For sure, various potential reasons for supporting have been created as of late. In any case, it appears to be reasonable for say that there isn't yet a solitary, acknowledged structure which can be utilized to direct supporting methodologies. To some degree, this hole emerges correctly in light of the fact that past work has concentrated on why supporting can bode well, instead of on how much or what kind of support is ideal for a specific firm. Without a doubt, a great part of the past work has the extraordinary ramifications that organizations should fence completely totally protecting their fairly estimated valuations from support capable risks (Gupta, 2011). 

There are a couple of theoretical investigations on risk identification in monetary organizations and a couple of experimental examinations that incorporate risk ID in banks. Risk recognition is the main phase of risk management and a critical advance in risk management. The initial phase in arranging the execution of the risk management work is to build up the urgent perception territories inside and outside the company. At that point, the offices and the workers must be allocated with obligations to distinguish particular risks. For example, loan cost risks or remote trade risks are the fundamental space of the money related office. Ensure that the risk management work is set up all through the entire partnership; aside from the parent organization, the auxiliaries to need to recognize risks and examine risks (Jennifer, 2017).

The importance of risk management for CBA

There are numerous different methodologies for risk distinguishing proof, for example, situation investigation or risk mapping. An association can distinguish the recurrence and seriousness of the risks through risk mapping which could help the association to avoid high recurrence and low seriousness risks and rather concentrate more on the low recurrence and high seriousness risk. According to Jim and Annelie (2014), risk recognizable proof process incorporates risk-positioning parts where these positionings are typically in view of effect, seriousness or dollar impacts. As needs are, the investigation sorts risk as indicated by their significance and helps the management to create risk management methodology to distribute assets proficiently.  

Business Area

Consequences

Likelihood

Mitigation strategies

Responsibilities

1

Exchange rate risk

Weakening or strengthening of the USD determines availability of credit

Somehow probable

Hedging of the currency

The foreign exchange currency should be effectively managed

2

Skilled labor turnover

Reduced competitiveness

Possible

Training employees

Motivating the staff members by providing remuneration for their work.

3

Commodity risk

Failure to recover loans affects the profitability of the bank

Possible

Insurance policy for customer deposits

The insurance policies should be taken for resolving the disaster issue with the amount of customer deposited in the bank

4

IT system failure

Cyber-attacks may paralyze operations in the bank

Highly probable

Overhauling and updating the systems

Managing backup support for overcoming system failure situation

5

Data loss

Severely disrupts operations

Possible

High cyber security in place

Security mechanism for restricting the confidential information of the customers

6

Interest rate risk

Affects profits or costs by 5%

Almost certain

Let the customers know to avoid defaults

Arrangement of awareness program for intimating the customers about the interest provided to them on the basis of market share

7

Workers compensation claim

Minor impact on profits or costs

Possible

Provide a safe working environment

Rules and regulation should be developed for providing safety environment at the work place

8

Machine breakdown

Minor disruptions

Possible

Automatically calls the repairer

Managing backup support for the smooth operational plan of the business

9

Outsourcing

Reduced oversight of third-party risk management

Possible

Review the prevailing outsourcing measures to guarantee they do not attract fines from the regulator

Prevailing outsourcing sources

10

Geo-political risks

exposure to more regulations, for instance not being permitted to ramp up trading of derivatives in a given dominion

Almost certain

Relocating to favorable countries

Political issues with government of different nations should be resolved

11

Conduct/behavior risk

individual accountability for risk administrators, with persons who accomplish some selected control roles now personally accountable for several procedures of wrongdoing

Highly probable

Special training of top managers

Arrangement of training and development program of ethical code of conduct

12

Organizational change

This causes a distress of being unable to adjust a business model to changes in technology

Possible

Keeping up with the trends in banking

Updating the database on the basis of every transaction done

13

Money laundering

Cases might arise regarding failure to comply with anti-money laundering (AML) laws.

Possible

A good legal department

Agreement should be signed for undergoing the money laundering procedures

14

Internal and external fraud

The distress caused by internal scam/fraud is also malicious like that of external fraud.

Highly possible

Implementing an effective and efficient auditing program

Implementation and monitoring of the audit program

15

Physical attack

the risk to banks regarding terrorist attacks is a constant alarm

Possible

The bank devices to announce a new mobile application to help emergency messages, and compulsory employee’s training programs

Training and development program to face the situation of emergency and using the approved safety software

16

Regulatory risks

The bank might be presented with fines/penalties.

Possible

All the employees should be aware of the changes in the industry.

Fair policies should be followed for judging the performance of the employees

17

Unauthorized trading

The effect on capital caused by an unauthorized trading event remains after the original opening has happened

Highly possible

Effective and efficient auditing programs

Implementation and monitoring of the audit program

18

Human risk

Probable losses caused by human error, either unwillingly or willingly

Possible

The bank should be more digital and automate the processes

19

Liquidity risk

May disable the bank’s operations due to lack of cash

Possible

Borrowing cash from other banks if there is a short-fall of liquidity

Agreement should be signed for burrowing the money from the other banks in case of financial crisis

20

Equity risk

Banks can accept equity as collateral for loans, and a negative alteration in the share price causes a loss or decrease in portfolio.

Highly possible

Using an asset of a higher value than the share price as collateral.

Agreement for managing loans approved to the customers

The CBA organization should focus on the establishment of inner control structure to provide sound working to the organization plan by deploying risk management framework. Right when properly sorted out, a plan of inside controls propels capable assignments and tried and true budgetary and authoritative enumerating shields assets and ensures consistency with imperative laws, headings, and institutional methodologies. The CBA risk manager should take the responsibility of managing inside controls which are attempted by an independent internal analyst who reports clearly either to the establishment's best administrative staff or its audit leading group of trustees. Given the noteworthiness of appropriate internal controls, the delayed consequences of audits or studies, paying little heed to whether drove by an inward inspector or by different resources should be attractively filed, as should management's responses to them.

The committee of sponsoring organization (COSO) focuses on analyzing the cause associated with the occurrence of fraud within the functional program of the enterprise. The examination takes a look at past investigations did by different scholars concerning risk management as it was noticed that risk management is a key factor in the money related execution of business in banks. All the past examinations built up that without an appropriate risk management measure, business in banks remain to bring about misfortunes on high default by borrowers in advance reimbursement or repayment of commercial loans (Common Wealth Bank, 2016). Along these lines, experts settled that when business in banks set up appropriate risk management component, they will have the capacity to handle the issue of awful advances. The following diagram shows the methodology which should be opted by the CBA to manage its enterprise risks:  

After an exhaustive analysis of Commonwealth Bank of Australia, there are no new context from PESTEL/SWOT analysis. The major risk of fraud and IT system failure were chosen because it is a major concern in financial institutions, such as banks. Risk recognition is the main phase of risk management and a critical advance in risk management. The initial phase in arranging the execution of the risk management work is to build up the urgent perception territories inside and outside the company. In simple conditions, one might say that interacting with a risk in advance is obviously much better than sitting tight because of its event. Risk Management is a strategy that is implemented for recognizing, wearing down and from then on reacting to a particular risk. The SWOT analysis of the CBA organization is discussed in below section.

Methods of risk identification

The SWOT analysis associated with the development plan of Common Wealth bank of Australia is depicted in the table below:

Strength

Weaknesses

Common Wealth Bank of Australia is one of the trusted bank which is having highest rating in the financial Institution (Blythe, Leonard, Evans, Grafton, Riordan, 2016)

The customers are having confidence on the sustainability program of the bank

The analysis of the customer satisfaction index had marked the CBA number 1 bank in satisfying the need of the customers.

The CBA is effective in providing better services and facilities to the demanding customers.

The credit portfolio of the CBA is of High quality which is having conservative approach for reducing derivative risks associated with the bank profile

The risks associated with the loan policies in terms of mortages can be reduced to about 13%

The bank always work for satisfying the customer requirement by including innovative program in the working platform of the bank

Technological innovations are efficient in managing risks associated with the company’s profile

The off-Shore borrowing is the major disadvantage of CBA banks

In 2017, bank faced the money laundering scandal which creates a negative image among the customers

There are limited branches of CBA across Australia

Limited opportunities for extension

Financial functionality of the bank get disturbed because of technological advancement

Opportunities

Threats

There is a wide scope of expansion of the Bank branches across Australia for increasing accessibility to the customers (Corporate financial services, 2016)

Free trading agreement can be signed between different nations

Opportunity for developing partnership with indigenous customers assistance services.

Risks associated with the government guarantee

Higher capital investment due to the inclusion of Australian Prudential regulation authority

Slowdown of financial activities due to the interdependency with the trading partner

Risk Management Context accordance to the CBA operation:

CBA Operation

Risks Identified

Risks Mitigation Plan

Development of financial policies

Compliance cost can be raised

The complexity of the economic structure of the bank should be resolved

Procedure for retrieving accurate information for carrying out financial operation

Operational risks associated with the business process

The database should be updated periodically

Database management system

Loss of database due to failure or disaster

Back up support should be managed for restoring the required data

Deployment of synchronized activity schedule

Processes are not completed on time which affects the financial management of the CBA

Scheduling procedure should be laid down

Principle 1: The CBA works on the principle of providing legal framework to their customers

Processes: The focus should be given on the operational process taken by the staff members to provide fair services to the customers

Principle 2: The confidential information of the customers should be kept secret

Processes: The security framework should be used for managing domestic policies to restrict the employees for leaking the confidential information of the user to the third party (Common wealth bank, 2018)

Principle 3: Criteria should be set for licensing procedures

Processes: The bank should be authorized for developing their own rules and regulation. The structural format for managing legal responsibilities should be provided to the working employees to get effective output in minimizing the risks associated with the operational plan of the enterprise (Common wealth bank, 2017 a).

Principle 4: Division of role and responsibilities among the supervisory head

Processes: Significant approach should be followed for dividing the responsibilities according to the expertise in handling the prescribed job 

References

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