Risk and return are basic finance and business concepts. Finding the right balance between the two is the objective of risk management. Risk managers identify, compute, assess, and prioritize credit, operational, strategic, and other risks.
Since the term “too big to fail” came into vogue after the 2008 financial crisis, risk managers are more in demand by financial firms and government regulators. Their roles have become important and complex. Banks must comply with regulations governing capital, liquidity, buffers, and funding restrictions. Risk managers enable banks to quantify the riskiness of loans and determine the probability of default. Hedge funds rely on risk managers to assess the risks traders and portfolio managers are taking on.
Typical responsibilities include reviewing trading models and setting position limits and sector exposures. They evaluate liquidity ratios. On the regulatory side, they develop bank stress tests and establish regulatory capital levels, as well as develop risk management policies and frameworks to ensure compliance.