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Managing Risks in Commercial and Retail Banking by AMALENDU GHOSH

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CHAPTER 2

Control Risk in Banking

2.1 HOW CONTROL RISK ARISES

Banks are susceptible to control risk because of the inadequacy of their control framework and the possibility of human failure in the application of control. Human failure may occur due to the lack of knowledge about the products and the business process. Control risk arises because of negligence in the application of control or because of complicity and compromise with the business principles and rules. Controls are predesigned checks to prevent occurrence of errors, slippages, and excesses in conducting the bank's business. But risks may emerge from unknown and unanticipated events, for which the control framework may sometimes fall short of the requirements. It is perhaps not possible to visualize every possible way in which risks can occur and then set up an elaborate control framework to respond to any risk event, because certain types of events rarely happen. Control managers must be able sense the dangers and set up a temporary monitoring mechanism as long as fears from such dangers persist. The alertness and the sincerity of individuals who are responsible for the application of control are more important than the elaborateness and the niceties of the control procedures. The impact of control risk is high, and therefore, a bank cannot but have a foolproof control system.

2.2 EXTERNAL CONTROL AND INTERNAL CONTROL RISKS

Banks are subjected to two types of control: external and internal controls. External control ...

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