Fundamentals of Risk Management

Risk classification systems
141
TAbLE 
11.4
Personal issues grid
Dependency
long term
Medium term
Short term
Financial risks
Procedures gap: How well do your procedures manage your 
finances?
1 Investments
Pension arrangements
Property purchase
Share purchase
Business 
opportunities
Betting habits
Insurance 
arrangements
2 Expenditure
Accommodation
Holiday pattern
Car purchase
Rail season ticket
Credit cards
Shopping behaviour
Travel arrangements
Infrastructure 
risks
Process gap: How well does your body facilitate your processes?
3 Health
Family history
Personal lifestyle
Vegetarianism
Medical treatment
Dieting
Weight gain
Exercise
Alcohol and drugs
Illness or accident
4 Emotional
Marriage and children
Ethnic origins
Sexuality
Friendships
Cosmetic surgery
Hobbies
Sex
Reputational risks Perception gap: How are you perceived by your peer group?
5 Personal
Personality
Neighbourhood
Criminal behaviour
Mood and 
temperament
Charity work
Clothes
Personal hygiene
Charity donations
6 Professional
Intelligence
Behaviour patterns
Qualifications
Redundancy
Changing jobs
Attending training
Continuous learning
Marketplace 
risks
Presence gap: What is your presence in the marketplace?
7 Occupation
Career selection
Education
Society memberships
Present training
Society activities
8 Income
Ambition
Seniority
Extra part-time work
Sale of shares
Selling possessions
Casual work

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Risk assessment
142
There is no standard risk classification system that can be used by all types of organizations. 
Banks face a large number of risks and these are usually divided into three main categories
of market risk, credit risk and operational risk. Often, the risk management framework and 
architecture will be different for the different types of risks.
Market risks are risks that occur due to fluctuations in the financial markets. The assets 
and liabilities of the bank are exposed to various kinds of market volatilities, such as changes 
in interest rates and foreign exchange rates. Market risk is primarily an opportunity risk that 
is embraced by the bank.
When the bank lends to a client there is an inherent risk of money not coming back, and 
this is the credit risk. Credit risk is simply the possibility of the adverse condition in which
the client does not pay back the loan amount. It is primarily a control risk that has to be 
managed.
Operational risk relates to failure of internal systems, processes, technology and humans, 
and to external factors such as natural disasters, fires, etc. Basel II defines operational risk 
as ‘the risk of direct or indirect loss resulting from inadequate or failed internal processes, 
people and systems or from external events’. Operational risk has gained profile because
of the need to quantify operational risk exposure, the increased use of technology and 
recognition of the critical role played by people in finance sector processes. Operational risk 
is primarily a hazard risk that has to be mitigated.
risk classification in the finance sector

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12
Risk analysis and