11.5.1 Why is this a relevant characteristic?

Banks have to deal with several kinds of risks: credit risk, concentration risk, securitisation risk, market risk, operational risk, liquidity risk and risk of excessive leverage.1 Naturally, those risks have to be managed. Hence, risk management is very important in banking. The financial crisis showed that several banks had a weak and inadequate risk management. Consequently, those banks undertook to improve their risk management. This was welcomed by the Commission, because an improved risk management contributes to the return to viability. For instance, in one of its decisions, the Commission noted that the improvements of the bank’s risk management were “very important elements to restore viability and profitability”.2

To some extent, risk management is related to the corporate governance framework and the organisational structure. For instance, the introduction of a Chief Risk Officer (CRO)3 or the creation of a risk committee within the Board of Directors4 are both measures that can be categorised as corporate governance measures. Likewise, the commitment that the Risk Management department will be fully independent from commercial networks5 concerns the organizational structure of the bank.

It should be recalled that a reduction of the bank’s risk profile can be achieved in different ways.6 A bank can reduce liquidity risk by improving its funding model (“liquidity profile rebalancing”7). Furthermore, a bank can focus on its core activities and withdraw from risky activities. These risk-reducing measures will be discussed in sections 11.6 and 11.8. The present section will focus on risk management.