Read the case study below and answer the questions that follow.

BANKS AND THE FINANCIAL CRISES: LESSONS'S LEARNT

Banks have travelled a hard road since the global financial crash of 2008. They have had to weave their way through the wreckage of bad debt, volatile funding markets and an uncertain economic environment. Now, tough new rules under Basel III and a host of local regulations will require banks to significantly increase capital and adhere to stringent new liquidity and funding mandates. Meeting the new standards will put a big dent in banks' return on equity and make it much harder for them to exceed their cost of capital. As banks begin to come to grips with these new realities, it is clear that many have been using an incomplete map to guide their business. The pursuit of revenue and earnings growth with insufficient attention to the balance sheet ran them into a ditch.

Leading banks now recognize that the ability to fully account for risk, capital and liquidity in line decisions will be a source of competitive advantage. Many bankers across the industry suggest new ways to think about running the bank with greater heed to the consequences of decisions on the balance sheet. The suggested approach links the bank's overall strategy into concrete objectives, governance and processes for managing risk, capital and liquidity at the level of each of its businesses, linked to the day-to- day decisions taken by operating managers as displayed in Figure 1;

The new orientation marks a welcome shift in bankers' strategic mindset from a drive to maximize short-term return on equity to a commitment to create sustainable, more valuable institutions. Among its chief virtues, it addresses two glaring vulnerabilities laid bare during the credit meltdown. Although every bank needs to refocus on making the balance sheet the responsibility of managers from the top of the organization to the front lines, banks' different business models present distinct risk profiles that call for different choices for how to as illustrated in Figure 2;

Irrespective of its business model or whether it operates in mature markets or emerging ones, nearly every bank evaluated is rethinking how to ensure that its risk and capital management capabilities are robust enough to withstand today's market volatility and positioned to adapt to the rapid changes sweeping the industry. None were convinced that they were there yet.

Reading Extracted from: https://www.bain.com/insights/how-banks-can-manage-operational-risk/

QUESTION 1 (100)

"Leading banks now recognize that the ability to fully account for risk, capital and liquidity in line decisions will be a source of competitive advantage. Many bankers across the industry suggest new ways to think about running the bank with greater heed to the consequences of decisions on the balance sheet. The suggested approach links the bank's overall strategy into concrete objectives, governance and processes for managing risk, capital and liquidity at the level of each of its businesses, linked to the day-to- day decisions taken by operating managers."

1.1 Considering the statement above, critically discuss the elements of risk and capital adjusted decision making as displayed in Figure 1.1. Your discussion should include the role of regulatory compliance, IT architecture and infrastructure as well as data quality management. (30)

1.2 "The accuracy of risk measurement methods crucially depends on the soundness of risk model and the availability of data. Proper risk modelling requires a thorough understanding of recurrent patterns that underlie the risk under consideration. The appropriateness of those risk models is inherently linked to data availability and thus the occurrence of events". (Young, 2018).

With reference to the statement above, critically explore the elements that are considered essential in assessing and measuring the level of risk in the banking sector. Your response should further explore the approaches that can be considered by financial institutions in measuring operational risk. (25)

1.3 Risk management is a process of thinking systematically about all possible risks, problems or disasters before they happen and setting up procedures that will avoid the risk, or minimize its impact, or cope with its impact. It is basically setting up a process where you can identify the risk and set up a strategy to control or deal with it. Bearing this in mind critically discuss the steps of the risk management process. (25)

1.4 According to the case, nearly every bank evaluated is rethinking how to ensure its risk and capital management capabilities are robust. Considering this, examine enterprise risk management and outline how it should be managed in different business models as illustrated in Figure 2.