Editing Finance (section)

===Risk management===
[[File:Crowds gathering outside New York Stock Exchange (4).jpg|thumb|Crowds gathering outside the New York Stock Exchange after the [[Wall Street crash of 1929]]]]
[[File:Northern Rock Queue.jpg|thumb|Customers queuing outside a [[Northern Rock]] branch in the [[United Kingdom]] to withdraw their savings during the [[2008 financial crisis]]]]
{{main|Financial risk management}}
[[Risk management]], in general, is the study of how to control risks and balance the possibility of gains; it is the process of measuring risk and then developing and implementing strategies to manage that risk.
[[Financial risk management]]<ref name="Christoffersen2011">{{Cite book |last=Peter F. Christoffersen |url=https://books.google.com/books?id=YkcMBGYbRasC |title=Elements of Financial Risk Management |year=2011 |publisher=Academic Press |isbn=978-0-12-374448-7}}</ref><ref name="Malz2011">{{Cite book |last=Allan M. Malz |url=https://books.google.com/books?id=rFX2f6AxH1QC |title=Financial Risk Management: Models, History, and Institutions |year=2011 |publisher=John Wiley & Sons |isbn=978-1-118-02291-7}}</ref> is the practice of protecting [[enterprise value|corporate value]] against [[financial risk]]s, often by [[hedge (finance)|"hedging"]] exposure to these using financial instruments. The focus is particularly on credit and market risk, and in banks, through regulatory capital, includes operational risk.
* [[Credit risk]] is the risk of [[Default (finance)|default on a debt]] that may arise from a borrower failing to make required payments;
* [[Market risk]] relates to losses arising from movements in market variables such as prices and exchange rates;
* [[Operational risk]] relates to failures in internal processes, people, and systems, or to external events (these risks will often be [[insurance|insured]]).

Financial risk management is [[Corporate finance#Financial risk management|related to corporate finance]]<ref name = "Drake_Fabozzi"/> in two ways. Firstly, firm exposure to market risk is a direct result of previous capital investments and funding decisions; while credit risk arises from the business's credit policy and is often addressed through [[Trade credit insurance|credit insurance]] and [[Bad debt#Doubtful debt reserve|provisioning]].  Secondly, both disciplines share the goal of enhancing or at least preserving, the firm's [[economic value]], and in this context<ref>John Hampton (2011). ''The AMA Handbook of Financial Risk Management''. [[American Management Association]]. {{ISBN|978-0-8144-1744-7}}</ref> overlaps also [[enterprise risk management]], typically the domain of [[strategic management]].  Here, businesses devote much time and effort to [[financial forecast|forecasting]], [[FP&A|analytics]] and [[Managerial finance#Managerial accounting techniques|performance monitoring]]. (See [[Asset and liability management|ALM]] and [[treasury management]].)

[[Financial risk management#Banking|For banks]] and other wholesale institutions,<ref name="DeMeo"/> risk management [[Quantitative analysis (finance)#Risk management|focuses on]] managing, and as necessary hedging, the various positions held by the institution—both [[trading book|trading positions]] and [[banking book|long term exposures]]—and on calculating and monitoring the resultant [[economic capital]], and [[regulatory capital]] under [[Basel III]]. The calculations here are mathematically sophisticated, and within the domain of [[quantitative finance]] as below. Credit risk is inherent in the business of banking, but additionally, these institutions are exposed to [[counterparty credit risk]]. Banks typically employ [[Middle office]] [[Investment banking#Risk management|"Risk Groups"]], whereas [[front office]] risk teams provide risk "services" (or "solutions") to customers.

[[Insurers]]<ref>Thomas M. Grondin (2001). [https://www.soa.org/globalassets/assets/library/proceedings/record-of-the-society-of-actuaries/2000-09/2001/january/RSA01V27N218PD.PDF  "Risk Management Practices in the Insurance Industry"] {{Webarchive|url=https://web.archive.org/web/20250320092151/https://www.soa.org/globalassets/assets/library/proceedings/record-of-the-society-of-actuaries/2000-09/2001/january/RSA01V27N218PD.PDF |date=20 March 2025 }}. [[Society of Actuaries]]</ref> [[Financial risk management#Insurance|manage their own risks]] with a focus on [[Solvency ratio|solvency]] and the ability to pay claims: [[Life insurer|Life Insurers]] are concerned more with [[longevity risk]] and [[interest rate risk]]; Short-Term Insurers ([[property insurance|Property]], [[health insurance|Health]],[[casualty insurance|Casualty]]) emphasize [[Catastrophe modeling|catastrophe-]] and claims volatility risks. For expected claims [[actuarial reserve|reserves]] are set aside periodically, while to absorb unexpected losses, a minimum [[Solvency II|level of capital]] is maintained.