Microsoft Word Thesis Gent (1). doc

Figure 12. Risk management system 
Source: HSE 2011, counstructed by author 
4.1 Risk Identification
An institution in order to manage the risks accurately must firstly identify and 
understand the possible risks which may occur as a consequence of both new and 
already existing business initiatives i.e. risks that accompany the lending activity are 
liquidity, credit, interest rate and many other risks. On the other hand, risk identification 
should be an ongoing process that should be looked at both transaction and portfolio 
levels, (Gestel and Baesens, 2009, p.40).
4.2 Risk Measurement 
In order to assess the influence that risks will have on the banking institutions, hence 
once the risk have been recognized they should be measured. The measurement can be 
conducted using different techniques starting with the simplest and to continue the most 
complicated. Moreover, a good risk measurement system must measure the risk in 
individual transaction and in portfolio. It should be emphasized that the precise and 
timely risk measurement are the core factor for the effectiveness of the risk 
management system. Furthermore, an institution, which does not have a risk 
measurement system, does not have the capability to monitor and control the risk 

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levels. Furthermore, the institutions should make sure that their risk systems are well 
functioning, this would be done by testing them periodically, (Gestel and Baesens, 
2009, p.40).
4.3 Risk Monitoring 
In order to monitor risk levels and to assess the risk positions and exceptions, all 
institution should establish a management information system (MIS). The monitoring 
should be reported accurately, timely, frequently and of course the reports should carry 
vast information, which should be passed to the competent people who will make sure 
to act properly, if needed, (RBOM, 2007).