Marketing Risk Management in Banks with their Meaning, Framework, Types, and also Importance; Credit risk management has traditionally been a major challenge for banks. As deregulation progresses, the market risk becomes relatively more important due to adverse changes in market variables; such as interest rates, exchange rates, stock prices, and commodity prices. Even small changes in market variables result in significant changes in the income and economic value of banks.
Here is the article to explain, Market Risk Management in Banks Meaning and Definition with Marketing Framework, their Types, and also Importance.
Market risk can define as the possibility of a bank losing money due to changes in market variables. There is a risk that the value of off-balance sheet positions will affect by movements in the stock market and interest rates, exchange rates, and commodity prices.
Market risk is the risk to bank profits and capital due to changes in market rates of interest rates or prices of securities, currencies, and stocks as well as the volatility of these prices. Market risk management offers a comprehensive and dynamic framework for measuring, monitoring, and controlling a bank’s liquidity, interest rate, currency, and equity, as well as commodity price risk, which should tightly integrate into the bank’s business strategy.
Scenario analysis and stress tests are other tools for assessing potential problem areas in a portfolio. Identify future changes in economic conditions such as;
- Economic/industrial turnover.
- Market risk events.
- Liquidity conditions.
What can affect a bank’s portfolio is a precedent for stress testing. As the underlying assumptions change over time, test results should review periodically. Market risk arises from dynamics of market forces, which for the banking sector can include interest rate fluctuations, maturity discrepancies, exchange rate fluctuations, market competition for services and products, changes in customer preferences and requirements leading to product aging, together with changing scenarios. national and international politics and economy. These risks are like maritime hazards that can arise from any change occurring anywhere at the national and international levels.
What is the meaning and definition of marketing risk management?
Market risk includes the risk of financial loss due to market price movements. Market risk assessed based on, but not limited to, the following valuation factors:
The sensitivity of a financial institution’s earnings or the economic value of its capital to adverse changes in interest rates, exchange rates, commodity, or stock prices. Management’s ability to identify, measure, monitor, and control marketing risk exposure by considering the size, complexity, and risk profile, and loss of the institution.
The nature and complexity of interest rate risk in banking arising from non-trading positions. Where applicable, the type and complexity of market risk positions from international trade and transactions. This topic also contains specific guidelines on interest rate risk, i. H exposure of the bank’s current and future profits and capital to adverse interest rate movements, and capital market rules, regulatory capital requirements for bank holding companies, and members of government-owned banks that are significantly exposed to certain market risks.
Marketing Risk Management Framework;
Successful marketing initiatives require a disciplined approach that aligns objectives with management practices and tools for developing expectations, budgeting costs, and monitoring key activities. Following the traditional marketing process of strategy development, marketing planning, implementation, and evaluation, a multi-level platform of business goals, performance indicators, risk factors, and control factors should develop. These development stages should consist of the following factors:
- Business Goals: Leadership goals for companies that drive marketing Key Performance Indicators (KPIs)
- KPIs: Marketing metrics that track how marketing meets its needs for business objectives. They are usually market-oriented/focused and results-oriented. This KPI provides a Key Risk Indicator (KRI)
- KRIs: They focus on the company’s business and are usually based on information (changes in customer preferences, behavior, and demands), strategic (poor strategy validation and prioritization), and operations (inefficient people, processes, and technology). KRIs are obstacles to getting good results in KPI marketing. They anticipate hazards and allow organizations to decide what needs to reduce them. KRIs usually flow into the development of Key Control Indicators (KCI).
- KCI: They relate to management and help manage processes to achieve goals. They serve to ensure that the company does not reach the risk indicators; KCI are the resources, controls, and mitigation factors for managing risk.
This platform combines marketing strategy with multifunctional implementation in the company. Level indicators reflect cascading top management goals with the day-to-day management of marketing programs and support for operational activities.
Changes in marketing costs;
For example, a credit card company looking to align its product message with the small business owner’s business needs requires a scalable marketing cost approach to managing the risks of this major change. They developed a system of indicators for key performance indicators (with a strong focus on business operations) and complemented them with risk and control indicators at the departmental level to enable rapid evaluation and adjustment of important additional procedures.
Marketing costs control very carefully against these key figures, as distribution only increases when the measures show increased efficiency. The company was able to redistribute 100 percent of its costs to on-demand programs within 15 months and increase its average return on marketing costs by 30 percent.
We repeat the process;
This framework is a continuous cycle in which control, risk, and effectiveness indicators dynamically reassess, and information, strategy, and operations then adjust and improve. It designs to address the unique challenge of allocating marketing resources in a multifunctional environment where marketing has significant responsibility but the limited authority to achieve increased revenue and profitability.
The dynamics of marketing risk management require methodologies and a set of tools that can facilitate rapid decision making and corrective action to produce successful results. However, marketing management must meet the requirements of this approach through timely decisions and adjustments in the allocation of marketing resources.
Types of marketing risk;
Today’s marketing environment is changing dramatically. To stay ahead of the game, you need to implement marketing techniques and strategies that take into account the risks of today’s business. Here are some of them:
Product Brand risk;
Any company can lose its brand value. This can be due to strong competition or poor marketing. If you overestimate the power of your brand, you may be using the wrong marketing techniques. It may be too late by the time you realize that you need to increase your efforts or expend more resources on promoting your brand.
Incorrect calculation of your target market;
Failure to do extensive market research, collect data in the wrong places, and misuse data can jeopardize your marketing plans. If you don’t understand your market, you can create strategies that will target the wrong people or get the wrong picture of your selling product. To create a marketing message that your target audience will love, make sure you do thorough research first.
New or Changing trends;
In today’s digital world, marketing trends change every day. When your marketing strategy is out of date, your business is at risk. Always keep an eye on the latest promotional messages in your niche, price changes, automation technology, and keep a check on what your competitors are doing.
Promotional or advertising risk;
The way you promote your product will have a strong impact on the success of your marketing plan. If you use a poorly calculated approach, your efforts will fail. Fake, misleading, and exaggerating news can also harm your marketing efforts. You ensure that your advertising techniques are attractive, powerful, and effective and ensure that your advertising practices are ethical.
The Importance of a Marketing Risk Management for Business Plan;
Risk is the main reason for uncertainty in marketing. You may wonder whether your message is reaching its intended destination; whether potential customers are responding positively, or whether your brand is recognizable. A marketing risk management plan can help you limit this risk. That’s why such a plan is important:
The most important role of a marketing risk management plan is for you to identify and identify any bottlenecks that your marketing team may face. Knowing what you’re dealing with can help you make the right decisions to avoid threats or minimize negative impacts. With this knowledge, you will feel more confident in developing and implementing marketing strategies.
The risk management plan provides you with important information about the risks you intend to take during the planning phase and after the implementation of your marketing measures. By analyzing each potential risk; you can find out how likely it is, how big, and how often it can happen. You can then change your marketing strategy to meet any challenges that stand in your way. Therefore, analyzing all the risks before starting your marketing efforts will prepare you for success.
Planning risk response and action;
Most threats are unique and every challenge needs to mitigate differently. With a risk management plan, you can overcome any challenge by taking precautions beforehand. You can choose to address the underlying risk, remove the driver, reduce its severity, or avoid it altogether. Once you’ve established and realized that your desired marketing message isn’t generating potential customers; you can respond with more effective strategies.
Product Risk monitoring;
If you keep track of all threats, you are less likely to fall victim to them. You can predict when a threat will become a serious problem and take action to counter it. In today’s marketing landscape, we constantly face challenges. Your competitors may innovate better, your customer preferences may change, or sales may decline. A risk management plan helps you monitor new and existing challenges and prepare for most of them.
Risk management is an important process that every company should incorporate into its business operations. Implementing a risk management plan into your marketing strategy can help you anticipate all challenges, prepare for them, and avoid them altogether.
How can I influence the bank to manage marketing risk?
Marketing risk affects banks in two ways:
Marketing risk is the potential error or loss that can result from a marketing plan. To limit your risk when trying to sell a product, you must have a marketing risk management plan in place. A comprehensive risk mitigation system will help you anticipate, prepare for, avoid or overcome the challenges you will face.
- Customer requirements change due to changing economic scenarios. Therefore, banks need to improve/modify their products to make them more comfortable for customers; otherwise, the aging of the products will shift customers to other banks thereby reducing the bank’s business and profits.
- Macroeconomic changes in national and international political and economic scenarios have different effects on the elements of risk in different business activities. This aspect has become important in modern times due to the increasing integration of world markets.
- Since both aspects are dynamic and change is the only constant; market risks must continuously monitor and appropriate strategies developed to keep these risks within manageable limits. Because you can only manage what you can measure, risk measurement always requires immediate attention.
Market risk can define as the risk of loss on off-balance-sheet and off-balance sheet positions due to unfavorable developments in market variables.
Marketing Risk Management in Indian Banks;
Market risk management should be the main concern of top management in banks. The board should clearly articulate policies, market risk management procedures, supervisory risk limits, review mechanisms, and reporting and auditing systems. The guidelines should discuss bank risk in a consolidated manner and formulate a clear risk measurement system that covers all material sources of market risk and assesses their impact on the bank. Operational regulatory constraints and line management accountability should also clearly define. The Asset Liability Management Committee (ALCO) shall act as the highest operating unit for balance sheet management within the performance/risk parameters set by the board.
Banks also need to establish an independent middle office to monitor the level of market risk in real-time. The middle office should consist of market risk management experts, economists, statisticians; and, general bankers and be functionally able to report directly to ALCO. The middle office must also be separate from the Ministry of Finance and not take part in the Ministry of Finance’s ongoing management (ALCO) regarding compliance with supervisory/risk parameters and summarize all assumptions of market risk position in banking.