Calculating Strategic Risk in Financial Institutions

Abstract

Banks face many intangible hazards that are difficult to calculate. Strategic risk is one of the most critical factors affecting a bank’s profitability, financial strength, and commercial success. The impact of risk on profit may be insignificant in the short term. Still, it may become highly significant in the medium and long term, with the potential to cause substantial financial losses and impair bank stability. Hence, strategic risk management is an important endeavor that must be carried out according to the rules set out under the Basel II framework. Analysis of strategic risk is a relatively new research enterprise. The current literature addresses the need to manage this risk and links it to the concept of economic capital, the amount of capital that a company should hold to survive such a risk. However, an action plan has yet to be produced. This paper attempts to address this gap by providing a mathematical analysis of the probability and effect of different strategic risk factors. Specifically, we develop a methodology for calculating a metric of strategic risk in terms of a bank’s risk assets. Furthermore, we suggest a way of integrating this metric into the calculation of the capital adequacy ratio.

Management of Strategic Risks for the Sustainability of SMEs in the Manufacturing Sector in Antioquia

“…During the analysis and evaluation of strategic risks, it was identified that companies without risk management systems do not utilize techniques to analyze and assess risks, confirming what has been previously found in the literature and highlighting the importance of having comprehensive risk management systems [35]. However, the leaders, based on their knowledge, experience, or external support, determine the level of priority of the risks.…”

“…Therefore, it should be integrated into the strategy [4]. The adoption of risk management with an integrated approach has become increasingly relevant [35], replacing siloed work [36]; this trend is called ERM (Enterprise Risk Management), which is a process led by senior management and boards of directors that is applied in the design and deployment of a strategy. An ERM system is a valuable tool that managers should implement to manage corporate reputation and maintain high performance in corporate social responsibility [37].…”

“…Many studies have approached the quantification of the impact of strategic risks in economic terms by defining the capital required or the associated losses to support the risks; it has been identified that these risks usually have a high impact on the economic and financial capacity of organizations [8,9]. It has also been established that the management of strategic risks is a critical factor in organizations, which affects profitability, financial strength, and commercial success in the medium and long term [35].…”

Digital Finance and Commercial Banks' Risk

“…It has also been argued that if the banking sector is too competitive, management's expectations of future revenues decline and thus favor conservative credit and investment policies, thus reducing commercial bank risk-taking. At the same time, when market resources are relatively limited in a highly competitive banking industry, commercial banks will improve their operational efficiency and risk prevention and control capabilities (Kedarya et al, 2023).…”