Posted by: Kaplan Schweser
Published: July 9, 2018
Where there is a finance enterprise, there is financial risk. Therefore, financial risk management is an essential aspect of running a successful financial firm. It is a skill set that’s in high demand, but what exactly is financial risk management? What does it entail? What kind of careers does it offer? This article tells you everything you need to know, including what it is, the techniques used, what is required, and careers in the field.
To paraphrase Wikipedia, financial risk management is a finance practice that uses financial instruments and data analysis to manage exposure to operational, credit, market, foreign exchange, shape, volatility, liquidity, inflation, business, legal, reputational, sector, and other types of risk. The purpose of this practice is to identify the sources of risk, measure it, and develop plans to address it.
Most major retail, commercial, and investment banks have financial risk management practices or departments. However, as you can imagine, it is not limited to banking. You can find financial risk management at nearly every major asset management firm, hedge fund, consulting firm, and regulator in the world.
The long laundry list of risks from the Wikipedia definition aside, in the world of finance, financial risk management is usually applied to four types of risk:
The techniques used in financial risk management differ based on the kind of risk involved. For market risk management, statistical models are used to forecast the probability and extent of significant change in market prices. Called “value-at-risk” models, they are used to set capital against potential losses. Firms also use stress tests that examine the impact of large hypothetical market movements on their portfolio values.
Managing credit risk starts by setting different levels of individual borrower, industry sector, and geographic area credit limits, all of which are usually based on internal credit ratings. Firms also use quantitative models to measure and manage credit risk.
To manage funding risk, banks and firms diversify their funding sources, hold liquid assets, and make contingency plans, such as a backup line of credit. They set funding goals as benchmarks to measure their current funding levels and take action when they are below certain thresholds.
Operational risk management requires studying how the bank, firm, or company is run, creating a comprehensive view of the business, and addressing anything that it appears might do the bank, firm, or company damage in the future. The steps involved are risk assessment, measurement and mitigation, and monitoring and reporting.
Here are the requirements for financial risk management, including education, skills, and qualities:
Our article on the qualities needed in financial risk management offers an even more detailed breakdown of these requirements.
Financial risk management careers are most often found in financial institutions such as banks, financial services companies, brokerages, and asset management firms. However, there are opportunities in other types of business, as well, such as insurance, software, oil and gas, and publishing companies. The following job roles are the most common:
These positions are just the tip of the financial risk management iceberg. You can get more details on them and explore other careers in financial risk management here.
The future is bright in financial risk management. It is a respected profession because financial risk management professionals are critical to the functioning of a business. As a result, the salaries for these positions are promising. According to PayScale, they can range from $55,000 to $150,000 annually. Its popularity as a career is also on the rise. Positions in the field are expected to increase at a rate of 7% over the next decade.
As noted in the section about the requirements for a financial risk management career, you should be focused on finance or a related field for your bachelor’s degree and have your eye on master’s or PhD. Earning the FRM designation can also help you secure a position in this field because it demonstrates to potential employers that you have a mastery of the important concepts in risk management. If this career move appeals to you, our FRM Exam prep study packages can certainly help you on your journey.