Profitability and risk management of financial institutions

Profitability and risk management are two key aspects of financial institutions that are closely related and often influenced by various factors, such as regulation, market conditions, competition, innovation, and customer behavior. In this response, I will try to summarize some of the main points and insights from the web search results that I found using the query “Profitability and risk management of financial institutions”.

One of the sources that I found is a literature review of risk, regulation, and profitability of banks using a scientometric study. This study presents a systematic analysis of the relevant publications on this topic and explores the relationship between these variables. It also proposes a policy initiative using a model that offers guidelines to establish the right mix among them. The study identifies the prominent authors, keywords, and journals that researchers can use to understand the publication pattern in banking and the link between bank regulation, performance, and risk. It also finds that concentration banking, market power, large banks, and less competition significantly affect banks’ financial stability, profitability, and risk. Ownership structure and its impact on the performance of banks need to be investigated but have been inadequately explored in this study.

Another source that I found is a summary of an article titled "Risk Management in Financial Institutions". This article examines how the net worth of a financial institution significantly influences its ability to hedge interest and foreign exchange rate risk. It shows that over time, US financial institutions with higher net worth hedge to a greater extent than those with lower net worth, and institutions with diminished net worth reduce hedging. The article also shows that hedging policies can mitigate downside risk and improve future financial performance, yet many financial institutions do not hedge. The article suggests that hedging requires collateral, and financially constrained institutions lack the resources to both lend and hedge the interest rate risks inherent in their loan portfolios and deposit bases.

A third source that I found is a book titled "Risk Management and Financial Institutions". This book provides a comprehensive and updated overview of the theory and practice of risk management in financial institutions. It covers the various types of risks, such as credit, market, operational, liquidity, and systemic risks, and the methods and tools to measure and manage them. It also discusses the role and impact of regulation, capital requirements, stress testing, and corporate governance on risk management. The book aims to help readers understand the financial markets, the risks they pose to various kinds of financial institutions, and how those risks are affected by common regulatory structures.

A fourth source that I found is a paper titled "Balancing Risk Management and Profitability: A Case Study of Islamic Banking in Malaysia". This paper examines how Islamic banks in Malaysia balance risk management and profitability in the context of the dual banking system, where Islamic banks operate alongside conventional banks. The paper analyzes the financial performance, risk profile, and risk management practices of Islamic banks in Malaysia from 2008 to 2012. It finds that Islamic banks in Malaysia have achieved higher profitability and lower risk than conventional banks, despite facing some challenges, such as higher operational costs, lower liquidity, and limited product diversity. The paper also identifies some factors that contribute to the success of Islamic banks in Malaysia, such as strong regulatory support, effective shariah governance, customer loyalty, and social responsibility.