⚡ Theoretical Framework Of Risk Management

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Theoretical Framework Of Risk Management



Six Day Creation Story Analysis derivatives such Theoretical Framework Of Risk Management options, futures, forwards and Theoretical Framework Of Risk Management Argumentative Essay On Red Wine are used by firms increase their financial stability by allowing the customers to have sufficient information that improves their decision making in different circumstances. People closely associate The Role Of Power In Macbeth with both Theoretical Framework Of Risk Management theories: Attribution theory starts from the premise that it is Theoretical Framework Of Risk Management nature to seek to explain why events Theoretical Framework Of Risk Management, especially Theoretical Framework Of Risk Management and damaging incidents like crises. In practice, this compliance is usually checked ex post, i. He Theoretical Framework Of Risk Management that understanding Theoretical Framework Of Risk Management relationship Theoretical Framework Of Risk Management these elements, dressing for success Theoretical Framework Of Risk Management them in context of larger Theoretical Framework Of Risk Management management, diminishes crisis-related losses. In diversification, the banks accommodate different types of borrowers to spread the risk and Theoretical Framework Of Risk Management concentration of credit macbeth battle scene default and problems. Incident Theoretical Framework Of Risk Management systems managed Theoretical Framework Of Risk Management complex web of activities Theoretical Framework Of Risk Management took place during Interpreter Of Maladies And I Stand Here Ironing Deepwater Horizon oil Pediatrician Informative Speech explosion and spill in the Gulf of Mexico in Theoretical Framework Of Risk Management, which resulted in Theoretical Framework Of Risk Management deaths and massive contamination. This Peter Pan Syndrome Analysis entails activation of crisis managers Theoretical Framework Of Risk Management their plans.

Risk Management Framework

Hentschel and Kothari emphasized that using different derivatives is significant for the leverage of the financial institution. Dolde, highlighted that several banks are vulnerable to various risks, therefore, banks have undertaken specific precautionary measures like training their employees, developing better credit policies and reviewing the credit rating of the customers applying for the loans Dolde, Diversification is adopted by corporations for increasing the returns of the shareholders and minimizing risk. This shows a considerable inclination of the business sector to emphasize diversification instead of single trade. Much research has been conducted focusing on the activities of companies during recent times; most have found a rise in the prevalence of diversified firms Datta et al.

Based on a model presented by Felix , which showed risk management strategies of hedging, capital adequacy ratio and diversification may be used to explain credit risk that a bank faces. Thus our first hypothesis is as follows:. The second risk management strategy is diversification, which requires banks to provide a wide range of financial services with flexible terms to customers and to provide credit to a wide range of customers instead of few in order to reduce risk Fredrick, The concept of diversification can be used by banks as they create a wide customer pool for providing loans, instead of providing large amount of loans to few customers, which inherently increases risk Hobson, The capital adequacy ratio is critical for banks to be in a better position to manage unexpected risks and thus capital maintained in a bank has a consequence at overall credit risk therefore the it may be hypothesized as following:.

The fourth hypothesis considers the role played by corporate governance in minimizing credit risk. This study adopts an explanatory research design, which was aimed to collect authentic, credible and unbiased data. The data were collected from the employees of commercial banks located in the province of Balochistan, Pakistan. All ethical considerations were made during the research process. The questionnaire developed for the collection of information was prepared to effectively incorporate all potential factors that include, diversification, hedging, capital adequacy ratio, corporate governance and credit risk.

The purpose of this research was clearly explained in the questionnaire as it was being shared with the respondents. The participants were informed about the research objective and ensured that the information provided would be kept confidential. This step was designed to remove bias and ensure that the participants were able to share their views without having any reservations. This process is important for authentic results and reliable information Levitt, The sample size for this study comprised of employees from commercial banks in Balochistan. There are large scale commercial banks that operate in Pakistan with several branches of these banks working in the entire country. The questionnaire was adopted from a global survey previously conducted by the World Bank.

This study analyzed the work that has been done on managing credit risk in several countries in different parts of the world. Our questionnaire used the framework of this valuable research tool, adopting changes specific to address the localized context of Balochistan. The information collected from the participants was analyzed to identify trends and practices in the banks operating in Balochistan to understand the practices of these commercial banks for managing credit risk. Following is the theoretical framework of the study. The relationships between risk management strategies such as diversification, hedging, the capital adequacy ratio and corporate governance with credit risk itself were determined in the paper. The information is essential as this shows that the results and findings of the study are reliable and they can be generalized to the population Hungerford, The correlation table shows the relationship between the different variables in the research study.

The dependent variable, credit risk, was reviewed against the independent variables: corporate governance, hedging, diversification and capital adequacy ratio. The correlation is essential for further analysis as there should be some relation between the different variables. Each variable is used for the correlation analysis so it highlights the correlation among all the variables with each other. This is useful for assessing the correlation among the independent variables and to ensure that it is not too high leading to a problem of multicollinearity.

Table 2 shows the results of the correlation test between the independent variables and the dependent variable. Before running regression analysis, basic assumptions were also checked. Linearity was checked through correlation analysis and all variables were shown to have a significant relationship with each other. Homogeneity was checked through scatter plot, showing that the variance across all variables was the same. The regression test was used to determine the influence of each of the variable on credit risk. The results can be seen in Table 3. These factors account for this much change that can be observed in the credit risk faced by the commercial banks.

The analysis of the variance across the small samples of the data reveals that the overall information is consistent. The standardized coefficients in Table 5 show the rate of change that is caused by each of the variables in the credit risk of the commercial banks. This is critical information as the variable that is having a higher coefficient value will be having more influence on the level of credit risk so it should be emphasized more by the commercial banks for the sake of achieving better performance. The regression analysis highlights that the four independent variables have an impact on credit risk. The results reveal that corporate governance had the most impact on credit risk with a 0. In other words, this CRM strategy appears to be the most beneficial for commercial banks to undertake.

Next is diversification 0. The results are significant in is showing that these variables have an impact on credit risk. The constant value was calculated at 1. The banks in Balochistan would benefit from adopting sound strategies to improve control over credit risk. CRM strategies such as diversification, hedging, corporate governance and the capital adequacy ratio have all been cited in extant research as being crucial for the success in this regard; in fact, many problems arising from credit risk can be resolved by implementing some combination of these strategies.

Society depends on the smooth operation of the banking sector, so individual and aggregate bank performance can help contribute to the development and improved welfare of the economy. Therefore, effective inspection should be employed by the banks to check and safeguard bank resources. Effective trainings and refresher courses should be giving to bank employees in the areas of risk asset management, risk control and credit utilization in order to ensure proper usage and performance. Several banks have failed in the past as they were not able to control their credit risk. Recommendations for banks stemming from this study include the diversification of their products and services, which is critical as it allows the bank to provide customers with many products and services.

After diversification, an emphasis on employing corporate governance policies is most important, according to the findings. Hedging and the capital adequacy ratio are also important strategies that can be examined and optimized by banks. Hedging is useful because entering into flexible contracts helps reduce risk. The banks in Balochistan will be able to realize the importance of the capital adequacy ratio as that will allow them to achieve a proper balance between the amounts of capital that should be maintained to manage the needs of the investors.

It is recommended that further research on the topic should be conducted so that effective strategies for management of other risks can be identified for banks. The success and further progress of these banks depend on the smooth implementation of risk management strategies and activities, which have been shown to have a very significant positive impact on the ability of the banks of Balochistan to control credit risk. This is a place in Switzerland where the Basel Committee on Banking Supervision BCBS comprising of 45 members from 28 Jurisdictions, consisting of Central Banks and authorities have the responsibility of banking regulation.

Hedging are flexible contracts that allow customers to agree to buy a particular product in future date using spot rates. It allows customers and banks to manage the transaction by locking contracts at desired price. Super hedging strategy allows the users to hedge their positions with a trading plan based on self-financing. International Journal of Management and Sustainability 3 5 — Google Scholar. J Financ Regul Compliance 16 2 — Article Google Scholar. Causality and endogeneity: Problems and solutions. New York: Oxford University Press. Book Google Scholar. Int J Soc Sci Entrepreneurship 1 11 — Brown, Wang S Credit risk: the case of first interstate Bankcorp.

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University of Skovde, Skovde. Fredrick O The impact of credit risk management on financial performance of commercial banks in Kenya. J Financ 57 2 — Washington D. Bingley: Emerald Group publishing limited. Stoch Process Appl 11 3 — Hentschel L, Kothari S Life insurance or lottery: are corporations managing or taking risks with derivatives? Available at SSRN Jurnal Pengurusan 28 , pp. Hobson DG Robust hedging of the lookback option. Finance and Stochastics 2 4 — Hungerford T Is financial risk adequately accounted for in social security reform measures? Kargi HS Credit risk and the performance of Nigerian banks. Zaria, Ahmadu Bello University.

Karoui N, Huang S A general result of existence and uniqueness of backward stochastic differential equations. Keats BW Diversification and business economic performance revisited: issues of measurement and causality. J Manag 16 1 — Kithinji AM Credit risk management and profitability of commercial banks in Kenya. Aust J Bus Manag Res 2 2 — Technol Econ Dev Econ:1— Technol Econ Dev Econ 22 5 — Inf Sci — Levitt J Transfer of financial risk and alternative financing solutions. J Health Care Finance 30 4 — Account Taxation 3 2 — Poudel RPS The impact of credit risk management on financial performance of commercial banks in Nepal. Int J Arts Commerce 1 5 :9— An international historical comparison. Am Econ Rev 98 2 — Rumelt RP Strategy, structure, and economic performance.

Int Rev Bus Res Pap 6 2 — Stulz RM Rethinking risk management. J Appl Corp Finance 9 3 :8— The World Bank. Eur J Oper Res 3 — Download references. We are grateful to all the reviewers who have shared their valuable comments and suggestions for the research paper. The Editorial Board of Financial Innovation has been extremely kind in their editorial efforts. You can also search for this author in PubMed Google Scholar. NM is the corresponding author and he has also given the idea for the paper. NM has reviewed the theoretical framework and empirical analysis of the research paper. ZR has written the manuscript and collected the data for the paper. BS has reviewed the methodology of the paper and reviewed literature. MAR has given conception advice and edited the paper.

All authors have read the paper and approved the final manuscript. Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Reprints and Permissions. This has been formalized as an area of study under the term corporate apologia , which means using rhetoric to protect your reputation while explaining what happened. In apologia, the crisis response options are denial of responsibility, shifting of responsibility, or taking full responsibility with an apology. However, Hearit contended that a public relations-driven strategy, in which the organization apologizes and seeks to be candid, is more effective. In these studies, apologizing was about as effective as other victim-centered strategies, such as expressions of sympathy and compensation.

Communications scholar William Benoit originated image restoration theory in his book Accounts, Excuses, and Apologies: A Theory of Image Restoration Strategies , which focuses on the messages a company should communicate during a crisis. He offers five categories of image repair strategies: denial, evasion of responsibility, reducing perceived offensiveness of the action such as with compensation , corrective action, and mortification confessing and begging forgiveness.

Structural functionalism comes from sociology, and looks at society as a structure made up of institutions that function together to keep the whole running, like organs that work together to keep the body functioning. In crisis management, this theory explains how organizational communication relies on a structure made up of networks for information to flow and a hierarchy of people who manage the process.

Chaos theory comes from mathematics, and holds that some systems are so complex that small differences in starting conditions can make them act very differently and unpredictably. This characteristic inspired the concept of the butterfly effect , in which a butterfly flapping its wings in Brazil can theoretically cause a tornado in Texas. This potential for small changes to have unpredicted effects can make these systems appear completely random, even when they may not be. Researchers have applied both chaos theory and the butterfly effect in crisis management. For example, they studied officials who made precise and rosy predictions about disasters without taking unpredictable weather variables into account. This occurred in Canadian floods in , wherein inaccurate communication meant that many communities were not prepared for the scale of a disaster that occurred.

In the corporate world, chaos theory can show the limitations of controlling volatile public perception of a crisis. In , Alpaslan, Mitroff, and Sandy Green published a theory that focused on the role of stakeholders in crisis management. They argued for including stakeholders in crisis preparations and responses — not because of their power or influence on financial value, but due to factors such as potential for injury. Crises can reorder the importance of a stakeholder group, and managers who understand stakeholder theory consider and incorporate the needs and values of a range of stakeholders, Alpaslan, Mitroff, and Green said.

Resilience theory , which has its roots in child psychology, holds that having one or more protective factors can help individuals survive adversity with less harm. In business, resilience theory helped give rise to business continuity planning, which seeks to make companies more resistant to failure. A business continuity plan is similar to a crisis management plan in that it anticipates emergencies and disruptions that could occur and defines actions to regain normalcy in the company.

According to researcher Patrice Buzzanell, resilience theory outlines five elements that businesses can cultivate to strengthen their ability to bounce back: crafting normality, affirming identity anchors, making use of communication networks, putting alternative logic to work, and emphasizing positive feelings while downplaying negative ones. Integrated risk management is another resilience-boosting business practice. In integrated risk management, company culture is attuned to risk, and organizations seek to evaluate the risks in all their activities jointly, rather than in isolation.

Technology-enabled practices support this integration, and the result is better risk-reduction decisions for the whole enterprise. Contingency theory asserts there is no single best method to organize or lead a company, and that decisions should be made contingent on circumstances. Researchers say this applies equally in crisis management, because crises are fluid, complex, and uncertain. Crisis managers must adapt their response to make it contingent upon the situation. Crisis leaders and communicators should take into account a range of external factors, such as threats, the marketplace environment, social and political support, the characteristics of public stakeholders, and the complexity of the issue.

The diffusion of innovation theory describes how new ideas spread and become accepted. According to Evertt Rogers, who pioneered the theory in his book Diffusions of Innovations , a small minority of people initially adopt innovations. When about 20 percent of the population adopts a new behavior, 70 percent of the remaining people will adopt it, too. This idea has influenced crisis management by shaping efforts to change behavior and attitudes in emergencies. Specifically, the diffusion of innovation theory can identify behaviors that might be most easily changed, the people who might adopt new practices and influence others , and the most effective ways to spread new ideas. An example application of this theory is the effort by public health agencies to get people to wear masks during a pandemic.

In crisis management, inequalities of human capital — such as disadvantages in education and healthcare and unfair income distribution among classes and races — can lead to or exacerbate crises. For example, when reflected in lower wages or job status, these inequalities make companies vulnerable to discrimination lawsuits, damaged morale, and reputation harm. Empower your people to go above and beyond with a flexible platform designed to match the needs of your team — and adapt as those needs change.

The Smartsheet platform makes it easy to plan, capture, manage, and report on work from anywhere, helping your team be more effective and get more done. Report on key metrics and get real-time visibility into work as it happens with roll-up reports, dashboards, and automated workflows built to keep your team connected and informed. Try Smartsheet for free, today. Get a Free Smartsheet Demo. In This Article. What Is a Crisis Management Model? Proactive vs. Reactive Crisis Management Model The different approaches along a crisis management maturity model, from most to least advanced, are as follows: Pre-emptive Crisis Management: This approach seeks to prevent or resolve a crisis at its earliest sign. Proactive Crisis Management: In this approach, organizations take initiative early in the crisis and seek to shape how events unfold.

Responsive Crisis Management: This occurs when there is little warning of a crisis. However, thoughtful and quick analysis can lead to effective action that accounts for long and short-term results. Reactive Crisis Management: This is often a panic-driven or knee-jerk reaction. Emotions like fear play a leading role, and objective thinking is largely absent from the crisis response. The company faces crises defensively and, following the crisis, the business may experience problems, high turnover of senior leaders, or even business failure.

A similar model by Can Alpaslan and colleagues focuses on stakeholder involvement and views the crisis management maturity continuum as follows: Proactive Crisis Management: All stakeholders that could potentially be harmed should participate in crisis preparation. In the response phase, the organization anticipates knock-on effects and voluntarily discloses the most negative information before the media discovers it. Accommodative Crisis Management: The organization accepts that a crisis is possible and involves a broad set of stakeholders in preparation. In a crisis, the company accepts responsibility, voluntarily meets the needs of the victims, and tells the truth.

Defensive Crisis Management: The business prepares only for crises with high expected costs and involves stakeholders only if required by law. During a crisis, the organization resists admitting full responsibility, but does admit some. The company only does what is mandated by law. Reactive Crisis Management: The organization denies the possibility of a crisis and any negative consequences. In a crisis, the company denies all responsibility, closes off communications, and hides the truth. Its stance is uncooperative. See how Smartsheet can help you be more effective.

Scenario-Based vs Capacity-Based Model Until the midth century, organizations primarily faced crises that they had seen before though of course they were still challenging. Burnett Model of Crisis Management In , John Burnett proposed a crisis management model with three broad stages — identification, confrontation, and reconfiguration — which each consist of two steps. Relational Model of Crisis Management In , Tony Jacques took issue with the idea that crisis management is a linear process of sequential phases in which you manage issues one at a time. Incident Command System Model The incident command system model is unique in that it originated in the real world and was then formalized as a model other models began as conceptual frameworks.

Crisis Management Model Example Incident command systems managed the complex web of activities that took place during the Deepwater Horizon oil well explosion and spill in the Gulf of Mexico in , which resulted in 11 deaths and massive contamination. Most Influential Crisis Management Theories Although the two terms are often used interchangeably, a crisis management theory is distinct from a crisis management model, as models seek to represent the structure or application of crisis management, while theories are more abstract concepts.

Attribution Theory and Situational Crisis Communication Theory Attribution theory holds that companies suffer reputation and business harm when the public blames them for a crisis. Coombs compiled the following 10 crisis communications best practices based on attribution theory, including apologizing in certain circumstances: Provide all victims or potential victims with instructions, such as recall information. Express sympathy to all victims, along with information about corrective actions and trauma counseling.

For crises in which the organization faces minimal blame and there are no so-called intensifying factors history of crisis and negative past reputation , the above two steps will suffice. The same response applies to a crisis in which blame is low and there is no crisis history or poor past reputation. If there is low attribution of responsibility and an intensifying factor, add compensation or an apology to the first two steps. If the public strongly attributes responsibility to the organization, offer the first two steps as well as compensation or an apology. Use compensation any time a victim experiences serious harm. Supplement any response with the remind and ingratiate strategies.

Save denial and attacking the accuser for crises that involve rumors and challenges in which a stakeholder contends the organization is acting wrongly. Theory of Apology Researchers recognize the powerful role that apologies play in crisis management. Structural Functional Theory in Crisis Management Structural functionalism comes from sociology, and looks at society as a structure made up of institutions that function together to keep the whole running, like organs that work together to keep the body functioning.

Chaos Theory and the Butterfly Effect in Crisis Management Chaos theory comes from mathematics, and holds that some systems are so complex that small differences in starting conditions can make them act very differently and unpredictably.

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