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Commonwealth Bank of Australia: Risk Management Assignment

Question

Task: Organisations today face risks from various sources. By referring to a company of your choice, identify significant potential risks (hazard, control or opportunity) faced by the company. Evaluate the risk management framework put in place against the selected risks. You should base your risk assessment on today’s internal and external working environment impacting the company. Comment on the effectiveness of mechanisms in mitigating or preventing risk impact to the company. Provide your recommendation to improve or enhance the existing measures.
The report should include: ? Introduction and Company background ? Identify existing risks and risk management framework ? Evaluation of risk management effectiveness ? Recommendation and conclusion

Answer

Introduction
In the present case scenario of risk management assignment, it is noted that different organizations are facing various internal and external risk factors that hamper the work process. The risk factors of some organizations are directly related to the customer's engagement. It mainly happens when there are several risk factors and fraudulent activities taken place into an organization like public and private banks. The external risk factors always exist with banks as their interest charges changing over time, and there is no security in the private banks in their existence. However, the public and the government banks are the ones that give maximum security to its customers.

The risk factors in a bank outlined in the context of risk management assignment are related to their operational and credit processes (Hakimi, 2020). It is a severe threat to a bank because it directly affects their reputation and loyalty towards the customers. It is essential to investigate the internal operations related to the credit and loan activities to analyze the bank's performance and detect any error or risks in advance. It will influence the bank managers to update their policies and regulations to develop the banking management system. Regular analysation of risk assessment will enable a bank to play a decisive and significant role to its employees and customers.

Company Background: Commonwealth Bank
Commonwealth Bank is an Australian based multinational bank selected in this risk management assignment that expanded its operations in Asia, USA, UK, Europe and New Zealand. It was converted into a public bank in 1991. The Commonwealth Bank had served as a government bank for almost 108 years before turning into a public company. The company is currently operating with more than 8,00,000 shareholders and has over 52,000 employees (Commonwealth Bank of Australia, 2020). The company deals with every kind of financial services and is known as the most accessible bank in Australia.

Over the past few years, the bank is facing various internal risks and external discriminations. One of the incidents discussed within this risk management assignment had happened in 2018 when the Federal Circuit Court accused a disability discrimination case against the Commonwealth Bank. It was reported that the bank’s new transaction facility was challenging towards Australia’s vision-impaired citizens (Gibson, 2019). However, the company has changed its operational process over time. The Commonwealth Bank, like any other major Australian banks, conduct both reports led and survey-based banking data investigations to understand its wellbeing (Comerton-Forde, et al., 2018) It is an essential method to find out any financial fraudulence or healthy internal banking operations.

Internal and External Working Environment of the case scenario of risk management assignment
Commonwealth Bank is currently considered as one of the major banks in Australia with its approximate revenue of AU $25,907 million in June 2018. It has been a part of the Australian Stock Exchange since 1991. The Commonwealth Bank is the most accessible Australian bank according to a report by MFI (Main Financial Institution) as it is consisting of technological, operational practices and improving the work environment continually. The company currently has almost 6.5 million digital users active which are a considerable amount to its contemporary banks in Australia (SWOT and PESTLE.com, 2019). The bank has seen a net profit of AU $9.23 billion in the financial year of 2018.

The Commonwealth Bank currently has an employment range of over 52,000 employees across over 15 different countries. The internal working environment maintains by the management team as they conduct several surveys among the employees to understand their satisfaction over their jobs. The company has a managing director, chief executive officer, chief financial officer, chief operating officer and several other operational teams from its international branches. The CEO plays an essential role in the Commonwealth Bank by interacting with other departmental heads. The company maintains an organizational matrix structure.

As per the research on risk management assignment, it is noted that during the past few years, the company is facing some controversies and issues in front of the real world. As one of the significant and most successful banks in Australia, the Commonwealth Bank had promised to help the environment by fighting against increasing usage of carbon and carbon emissions. However, several reports have confirmed the bank's engagement in investing and gaining profit from the gas and coal supply in the Great Barrier Reef. After facing massive pressure from its customers and citizens of Australia, the Commonwealth Bank has ended the deal with the Great Barrier Reef. The research conducted on the risk management assignment signifies that the bank has been accused of the displacement of over 20 million bank accounts in 2018. The company has done an extensive investigation against this wide mishap.

Discussion on the Existing Risks
The Commonwealth Bank of Australia has been adopted several methods to understanding its existing risk factors and processes to resolve them. The company is facing some issues related to its financial wellbeing evaluation and foreign exchange. Other risk factors mentioned in the risk management assignment are considered as moderate and inconsiderable in terms of their assessment.

  1. Differences in Financial Wellbeing Scale: In their new technique, the company is now observing its financial records and a half-yearly survey among the customers to understand the financial status. The Commonwealth Bank has developed its two analysis scales – Social Research and Applied Economics (Haisken-DeNew, Ribar, Salamanca, Nicastro, & Ross, 2019). The company conducts regression analysis on these aspects and observes the financial wellbeing by the management. However, the measurement sometimes pointed out significant differences between the results of these two scales. It will bring a considerable consequence to the company because the analysis directly defines internal fraudulent activities.
  2. Foreign Exchange and Interest Risks: The Australian government had decreased their control over various Australian banks’ financial system. Later, it is stated in this aspect of risk management assignment that the banking globalization in the 1990s enables multiple opportunities for most of the Australian banks. However, being a multinational bank, the Commonwealth Bank is facing risks related to the continuously changing interest rate and foreign exchange rate of different countries. It influences a significant risk for most of the major banks in the exposure of the market banks. This particular risk is a significant consequence of the Commonwealth Bank, as most of the small and medium banks do not have risks related to the foreign exchange.
  3. Risks related to Bank Loans: Public banks in most of the countries do not engage in risk-taking situations. It is the main reason behind depending on the public banks rather than private banks. However, financial difficulties and environmental conditions lead a bank to take various risky decisions which create a direct impact on the banks (Samet, Boubakri, & Boubaker, 2018). Being the most accessible bank in Australia as discussed in the context of risk management assignment, the Commonwealth Bank sometimes has faced a dangerous situation related to giving bank loans at an attractive rate. In the risk assessment measurement, the risks associated with the bank loans are considered to have an ordinary consequence on the banking operation.
  4. Moral Hazard: The moral hazard among public banks causes a severe effect on the bank's reputation. Most of the time, the moral hazard of a bank created from the deposit insurance and its unstable situation (Ngalawa, Tchana, & Viegi, 2016). However, the Commonwealth Bank has rarely seen any moral hazard in their operations. It is the main reason that the risk assessment measurement has put the moral hazard to have an unimportant consequence. Moral hazard is an essential parameter for understanding a bank's financial stability. The Commonwealth Bank is considered as one of the most stable banks in Australia with its multinational status.
  5. Operational Risks: The internal management system of a bank plays a significant role in maintaining the activities and operations lead by the bank. The management heads in the Commonwealth Bank control different areas related to the financial services. However, sometimes the relationship between the governance of corporate sectors with a public or private bank affects a bank's performance in both a negative and positive way (Salim, Arjomandi, & Seufert, 2016). The risk assessment has considered operational risks will create an inconsiderable consequence on the bank. It is because the internal management system of the Commonwealth Bank is stable and heavily controlled by its management team leaders. The company needs to maintain and sustain the banking operation before turning into a severe threat.

Risk Assessment Matrix for the case of risk management assignment
The risk assessment of the potential risks of the Commonwealth Bank of Australia will define the intensity of those risks. It is a guidance for the bank to identify the major or significant risk factors and immediately making plans for resolving those risk. Banking risks are the consequences that create a negative impact on the organization's financial agents (Anghelache, Anghelache, Anghel, & Nita, 2016). The Commonwealth Bank has already achieved several milestones to be one of the major banks in Australia. One of the main reasons outlined herein risk management assignment behind their consistence performance is being able to recognize various organizational risks and errors and implement multiple techniques to eliminate them. The internal risks need an extensive study to identifying essential areas to prevent them from potential hazards. The economic assessment and social interaction are two main tools in identifying the company's performance structure and detect any fraudulent activities. 

The risk management assignment illustrates that one of the main reasons behind assessing the potential and existing risks is to maintain the financial sustainability of a bank. The Commonwealth Bank has regularly observed various internal and external activities, evaluate potential risks and appropriate solutions for further growth. The financial risks and poor operational qualities of a bank lead the bank to face financial difficulties and loss of reputation (Britchenko, Kunitsyna, & Kunitsyn, 2018). The status of a public bank is its most vital asset to secure the customer's trust over various offered policies and financial services.

   

Consequences

Consequences

Consequences

Consequences

Consequences

   

Unimportant (1)
Moral Hazard

Inconsiderable (2)
Operational Risks

Ordinary (3)
Risks related to Bank Loans

Major (4)
Differences in Financial Wellbeing Scale

Significant (5)
Foreign Exchange and Interest Risks

Likelihood

Once a week/ very often (5)

Ordinary (5)

Major (10)

Major (15)

Significant (20)

Significant (25)

Likelihood

Once a month/ have high chances (4)

Ordinary (4)

Ordinary (8)

Major (12)

Significant (16)

Significant (20)

Likelihood

Once a year/ can happen (3)

Inconsiderable (3)

Ordinary (6)

Ordinary (9)

Major (12)

Major (15)

Likelihood

Once in ten years/ has not happened before (2)

Unimportant (2)

Inconsiderable (4)

Ordinary (6)

Ordinary (8)

Major (10)

Likelihood

Once in more than ten years/ can happen only in rare or extreme cases (1)

Unimportant (1)

Unimportant (2)

Inconsiderable (3)

Ordinary (4)

Ordinary (5)

Analyzing Risk Management Framework

Response

Strategy

Examples

Avoid

The Commonwealth Bank illustrated in the risk management assignment needs to avoid its inconsiderable risks. These existing risks need the implementation of avoidance technique to decrease its potential threats to the company and prevent the company from its impacts.

· The company needs to strengthen its internal management system to tackle the risks related to banking operations.

· The company needs to conduct an effective survey process among its employees to understand operational errors.

· This point presented in this risk management assignment mentions that the company needs to change and implement better operational methods to eliminate this particular risk and make the system sustainable.

Transfer

The company needs to transfer the risks to another external management team to reduce the responsibility on the internal management team. If the risk factors like differences in financial wellbeing scale can observe by an external group, the company will get an unbiased report.

· The company needs to appoint an external management team to conduct the financial evaluation and social interaction process.

· It is an essential step to understand the company’s wellbeing and take suitable actions if needed.

Mitigate

The Commonwealth Bank needs to mitigate the significant and significant risks to prevent the bank from facing any financial loss or tarnishing its reputation. It is the only way to maintain the sustainability

· The company needs to pay extra attention to the continually changing foreign exchange and interest rates in the international market to make plans in advance.

· The importance of customer’s feedback needs to be considered by the company for further improvement.

Accept

The company needs to accept its risks that come from their fault. The risk factors like moral hazard need to be considered as one of the essential risks but keep the problem aside until it occurs effectively. It is the best way to deal with a threat like this, and maintain other necessary risks at the same time.

· The company selected to build this risk management assignment needs to work on their internal risks to decrease its effect over time.

· The internal risks can affect negatively on the company’s reputation. It is the company’s responsibility to accept their fault and resolve the problem as soon as possible.

How will you evaluate the effectiveness of Risk Management in the present context of risk management assignment?
The Commonwealth Bank of Australia is the most significant institution of finance in the Australian continent. The management board of the bank must understand the evaluation of effectiveness in risk management as a vital factor for contributing wellbeing to the customers financially and on a broader aspect of the economy. The operational risks and moral hazards include the following. Firstly, the prudential inquiry of the 2018 APRA lacked maturity in the non-financial practices of the group (Li, Allan, & Evans, 2017). Secondly, the information technology and its development have increased the risks in the information security of the company. Thirdly, the complex structure of the existing operations of the group encourages the risk of slower execution influencing on the implementation of various strategies. The potential risk managing factors mentioned in the risk management assignment to curtail the risks can be discussed as the following.

Firstly, the readings developed in the risk management assignment depicts that the progress must be made to enhance risk governance, reinforcement of ownership in the business, and elevating the contemporary status of the management's risk curtailing actions must be functioned within the company. Secondly, contributions must be made on operational capabilities of risks ensuring their evolution concerning the changing ambience of operation within the group (Shamsuddin, 2020). Programs must be made in identifying critical elements of data for driving decent quality and lineage. Thirdly, the plan of incorporating changes must be supervised by the governance with an initiative to look upon the transformational insights. The loan risks include interest risks involving the rate of interests, risks involving currency, export and import risks, and threats involving people and assets.

The solutions adopted by the bank must include the following points discussed within this risk management assignment. Firstly, the flexibility in loans and bill facilities must be provided by the bank. Secondly, flexibility in forwarding foreign exchange and other currency options must be provided by the bank (Sheedy & Jepsen, 2018). Thirdly, the bank must involve in the international transfer of money, updated online documentary, letter of documentation or credit factors, and advances in trade opportunities. The company must include insurance in export finances and trade finances and act as a facilitator providing support to the investments. The foreign bills generation within the bank must also be initiated and also negotiated. The bank must indulge in finances of export without any recourses. The trade exchange must be well-developed within the bank (West, Kenway, Hassall, & Yuan, 2019). Lastly, the bank must be concerned with the cover of succession and key persons. The content prepared within this risk management assignment mentions that it must include building, stocking and covering equipment, covering the indemnity professionally along with the liability of the officers and directors.

The evaluation of the risk management in an effective way caters the way for understanding the probable uncertainties faced by the Australian Commonwealth Bank. They tend to develop strategies to manage or curtail down the risk factors by adopting potential solutions or measures. Along with the elements like the emergence of technological advancements, changing expectations of the society, regulatory oversight in the form of elevation, undetermined conditions in macro-economy, the competitive landscape in changing environment, various factors related to risks emerged. As stated in the risk management assignment, the Australian Commonwealth Bank must adopt possible measures in curtailing these factors of risks to develop a better economy and maintaining the name and growth of the most significant bank of the continent. Risk indicates the uncertain and unknown future of the company. It is the expression challenging the objectives and the purposes of the organization.

The Australian Commonwealth bank takes help of the risk assessment matrix to evaluate the risk factors within the company. By applying this measuring tool, the Australian commonwealth bank identifies the upcoming risks in terms of its probability conflicting the degree of impact. After identifying the risks in the present case of risk management assignment, the company incorporates all the risk management factors and deal with the risk easily (Gander, et al., 2011). Since it has an inclusive organizational structure, the sense of trust and good verbal communication between the employees and the authoritative body reduce half of the chances of facing risks. The commitment and support from the management body helps the company to deal with their risks. The Commonwealth Bank of Australia explored in the contents of risk management assignment is bound to be aware of the new entrants in the banking industry. By not doing so, there will be chances that the company comes across immense trouble and their success rate in the market will be reduced. By applying the risk management factors, it can be possible to get updates regarding the new entrants and the company will be able to improve its services in accordance of the other entrant’s competence. To fight out this challenge highlighted in this segment of risk management assignment, the Commonwealth bank of Australia has to keep modifying the financial framework of the company.

The lack of contingency planning in finance controls and missions may lead to face risk factors and the new entrants may get the opportunity to gain more reputation than the very company. Along with the contingency planning, there are security planning and crisis planning. These plans help to guess the critical probabilities that may affect the objectives and the purposes of the company. If the company has a poor market assessment and market research, it will leave a negative impression on the company as well as hamper the decision-making capacity. If the company does not have sufficient backups and planning in these sectors, there are chances that the new competitors will take over the market and the customer base. They provide with proper training to their employees to overcome the risk factors (Shahidehpour, Yamin, & Li, 2003). The dedicated and committed management body evaluates the risks far before it hits the company.

The political risk noted herein risk management assignment that includes macro and microeconomic risk may emerge in the company (West & Worthington, 2006). The various policies of the government can have negative impacts on the organization. In order to overcome such risks, the commonwealth bank of Australia makes a thorough research regarding all the policies. They also keep track of the new policies and regulations being announced by the government and modifies their structure accordingly. It is not only about national political risk, while collaborating with other countries, the organization makes sure that all the laws and the foreign policies are involved in their infrastructure and the banking system. (Shamsuddin, 2020) The highly developed information system of the company gets all the legal and political information to demolish the risk factors and helps the company to move towards success.

Recommendations
From the clear that above discussion on risk management assignment it has been found that the one of the key risks faced by the Commonwealth bank is facing bad debt. In order to mitigate this risk, it is essential for the bank to go for a thorough background check for the borrower. This provides the bank a protection in advance as they can judge who can repay it and who cannot. This background check enables the bank to gauge the financial credibility.

Monitoring the corresponding borrower during the entire loan agreement process is also helpful for mitigating the risk faced by the bank and end for a bad debt. In this agreement, the borrower is liable to share their financial condition in a report format from time to time. This enables the bank to see the forthcoming danger and take the necessary action in time.

Establishing a credit limit based on the previous loan repayment percentage can also prove to be beneficial for the bank to ensure their financial wellbeing. The study developed in this risk management assignment illustrates that it is also crucial for the bank to make their credit terms clearer for their customer. Engaging with credit as well as political risk insurance is also beneficial for the bank to withstand the uncertainty during unfavorable time.

Conclusion
The risk factors identified in the above context of risk management assignment in a public bank are the most crucial part among its customers and employees. The Commonwealth Bank is the most accessible and one of the major banks in Australia. The risk factors and its mitigation have to be the essential part of the Commonwealth Bank to sustain its position. The financial structure of a bank can be hampering for its "non-performing" loans and difficulties in the credit management system (Cucinelli & Patarnello, 2017). However, the existing risks of the company can be detected by observing the internal operations and feedback from the customers. The customer care unit of the bank needs to function appropriately and interact with the customers to answer their enquiries.

The competition with increasing contemporary private banks leads the public banks to face difficult situations and various risk factors. These risks can be recognizing and resolve by implementing effective assessment techniques. The continuously changing economic environment and unstable credit management can influence the banks to decrease their loan amount (Alekseeva, Kornilova, Tolstova, & Vasilieva, 2020). However, the readings of risk management assignment justify that a bank can prevent its risk factors and sustain its operations to retain the customers. The customer's trust is an essential asset for any bank. The Commonwealth Bank operates its internal and external management system effectively to keep the position of Australia's most accessible bank.

References
Alekseeva, N., Kornilova, L., Tolstova, M., & Vasilieva, O. (2020). Research of the organization and instruments of management of credit bank risk. IOP Conference Series: Earth and Environmental Science. 433, p. 012018. IOP Publishing.

Anghelache, C., Anghelache, G., Anghel, M.–G., & Nita, G. (2016). General Notions on banking Risks. Risk management assignment Romanian Statistical Review Supplement, 64(5), 7-10.

Britchenko, I., Kunitsyna, N., & Kunitsyn, I. (2018). Reputation risks, value of losses and financial sustainability of commercial banks.

Comerton-Forde, C., Ip, E., Ribar, D., Ross, J., Salamanca, N., & Tsiaplias, S. (2018). Using survey and banking data to measure financial wellbeing. Commonwealth Bank of Australia and Melbourne Institute Financial Wellbeing Scales technical report(1).

Commonwealth Bank of Australia . (2020). Our history. Retrieved April 7th, 2020, from https://www.commbank.com.au/about-us/our-company/history.html

Cucinelli, D., & Patarnello, A. (2017). Bank credit risk management and risk culture. In D. Cucinelli, & A. Patarnello, Risk Culture in Banking (pp. 321-348). Springer.

Gander, P., Hartley, L., Powell, D., Cabon, P., Hitchcock, E., Mills, A., & Popkin, S. (2011). Fatigue risk management: Organizational factors at the regulatory and industry/company level. Accident Analysis & Prevention, 43(2), 573-590.

Gibson, J. (2019). Public Interest Litigation Matures in Australia. Hum. Rts. Defender, 28, 19.

Haisken-DeNew, J., Ribar, D., Salamanca, N., Nicastro, A., & Ross, J. (2019). Improving the Commonwealth Bank of Australia-Melbourne Institute Observed Financial Wellbeing Scale.

Hakimi, A. (2020). On the Relationship between Operational Risk and Tunisian Banks Performance: Does the Interaction between the Other Risks Matter? Business and Economics Research Journal, 11(1), 107-118.

Li, Y., Allan, N., & Evans, J. (2017). A nonlinear analysis of operational risk events in Australian banks. Journal of Operational Risk, Forthcoming.

Ngalawa, H., Tchana, F., & Viegi, N. (2016). Banking instability and deposit insurance: the role of moral hazard. Journal of applied economics, 19(2), 323-350.

Salim, R., Arjomandi, A., & Seufert, J. (2016). Does corporate governance affect Australian banks' performance? Risk management assignment Journal of International Financial Markets, Institutions and Money, 43, 113-125.

Samet, A., Boubakri, N., & Boubaker, S. (2018). Does public–private status affect bank risk taking? Worldwide evidence. Journal of International Financial Markets, Institutions and Money, 53, 287-306.

Shahidehpour, M., Yamin, H., & Li, Z. (2003). Market operations in electric power systems: forecasting, scheduling, and risk management. John Wiley & Sons.

Shamsuddin, A. (2020). Interest rate and foreign exchange risk exposures of Australian banks: A note. International Journal of Banking and Finance, 6(2), 129-138.

Sheedy, E., & Jepsen, D. (2018). Risk Management Maturity in Large Australian Superannuation Funds. Macquarie University Faculty of Business & Economics Research Paper.

SWOT and PESTLE.com. (2019, December). Commonwealth Bank of Australia (CBA) SWOT and PESTLE Analysis. Retrieved from SWOT and PESTLE.com: https://www.swotandpestle.com/commonwealth-bank-of-australia/

West, C., Kenway, S., Hassall, M., & Yuan, Z. (2019). Integrated Project Risk Management for Residential Recycled-Water Schemes in Australia. Journal of Management in Engineering, 35(2), 04018063.

West, T., & Worthington, A. (2006). Macroeconomic risk factors in Australian commercial real estate, listed property trust and property sector stock returns: A comparative analysis using GARCH-M. Risk management assignment University of Wollongong Faculty of Commerce Papers.

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