Financial Innovation & Risk Management of Goldman Sachs Essay

Financial Innovation & Risk Management of Goldman Sachs - Essay Example The paper tells that over the recent years, commercial banks in the banking industry have recorded dramatic losses because of risks it faces due to global crisis. This is because, in the financial perspective, risk is assessed as the tendency whereby the actual return does not match with the expected return. As a commercial bank, Goldman Sachs faces market risk, financial risk and operation risk that arise from either external or internal activities. With banks facing a crisis as a result, of risks that arise from credit exposure and interest rate position among other risks they have resolved to upgrade the risk management strategies and theories they use. Goldman Sachs is one of the banks using risk management strategies that either eliminates or mitigates some risks. In other instances, Goldman Sachs management decides to shift the risks to other parties. The risk management strategies comprise of liquidity risk management, operations risk management, credit risk management and mar ket risk management that has over the years, seen the bank remain stable during both the financial and economic crisis. More significantly, banks carry out risky business, as it provides financial services to its clients. In the banking industry, Goldman Sachs is well known as the leading securities and global investment-banking firm. It has three main business lines that it operates comprising of investment banking, asset management and securities services and trading and principal investments. Goldman Sachs is an international corporation that provides services to a substantial and diversified client base that is widely distributed worldwide. With banking institutions in over twenty-three countries, it has diversified its operations outside the United States and grown globally (Goldman Sachs, 2012). Its wide base of clients includes other financial institutions, governments, corporations, and high net worth individuals. As a result, the management of Goldman Sachs focuses on being the leading member in worldwide financial markets besides being a leading advisor of choice to its wider clients’ base. Goldman Sachs just like other financial institutions faces business and operational risks that originates from its internal activities apart from financial risk that arise from outside activities (Goldman Sachs, 2012). As a result, liquidity, market and credit risks fall under liquidity risk because it relates to the outside clients of the bank. On the other hand, legal, people, system, equity investment and external risks relate to day-to-day operational risks of the bank. At Goldman Sachs, the management and strategic risks are more likely associated with business risks within the banking institution. More than often, institutions face a financial crisis, and economic crisis that have affected Goldman Sachs bank operations just like any other banks in the industry. Nonetheless, the impact of the crisis depends on the level of risk management an organizati on has been implemented (Goldman Sachs, 2012). With the high level of competition that exists in the banking industry today, besides the existence of an open economic system that is followed by sensitive market players and other strong external influences it is more challenging for institutions to carry out efficient liquidity management plans. Goldman Sachs, as one of the strong banking institution with branches in different countries faces competition from non-banking financial institutions that has recently seen banks declining reliance on the levels of deposits because of the immense competition. In addition, the competition in the banking industry has become immense thus, affecting the global position of Goldman Sachs in the financial market. With pressure mounting up for accountability to the shareholders based on risk management, Goldman Sachs just as, many banks have resorted to ensure that it mitigates risks while efficiently managing its liquidity levels