Risk arises from uncertainty of importance, while unimportant uncertainty
does not give rise to risk. Therefore for risk to exist, the person or
organization evaluating risk must place some level of importance to the
uncertainty being assessed. Risk management is the identification of any
potential risk, the evaluation of the level of importance associated with
the risk, and the identification of what, if any, action will be taken to
reduce or eliminate the risk. The five steps in the risk-management
1. Risk Identification - Determine if risk actually exists, or if only
2. Risk Assessment - Determine the level of risk that exists (low,
3. Selection of Risk-management Techniques - Identify if, and how, risks
can be managed. Generally decisions can be made to avoid risk,
minimize risk, pass the risk to another entity (e.g. purchase
insurance) or retain the risk and live with the consequences.
4. Implementation - Put the plan into action.
5. Review - Assess how effective the strategy was, and what improvements
could be made the next time a similar situation arises.
Every person, every group and every organization is involved in risk
management at one time or another. Organizations involved in the financial-
services field, such as banks, must continually (and effectively) work
through the above steps if they wish to remain in business. Following is a
brief analysis of loan risks that are involved with three types of clients:
an MBA student, a single mother and a retired professional. A brief
conclusion that draws from the analysis summarizes this assessment.
• MBA Student: Likely in a debt-incurring or asset-reducing mode
at this life stage, since wage earning may need to be set aside
for the duration of the MBA program, and expenses (living
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