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prediction and more effective solutions to the potential dangers in the global financial market. On the other hand, growing interactions among financial institutions in the world make room for a possible sequential effect if something goes wrong. The consequences might be “far beyond the doors of the banks and investors themselves”. (Utrecht University 2010)In spite of the risky world they operate in, banks are truly risk machines in the economies. “They take risks, they transform them, and they embed them in banking products and services”. The first and foremost aim is to increase revenues for the bank thanks to the relationship between risk and return mentioned earlier.

Second, competitive advantage might be a powerful motive for banks to take risks (Arora & Agarwal, 2009). For example, a commercial bank trades oil with an airline corporation in form of forward contracts. This is one type of derivatives offered by the bank that is extremely risky. Yet they can gain, either a little or a lot, if their estimation is on the right track. Risk management in a bank is “a set of policies to manage and monitor transactions and activities which can adversely impact banking operations, and enact proactive measures to identify, control and minimize these risks”. (Ardrey, Perryer, Keane & Stockport 2009, 2) The policies in practice usually establish standard processes, models, practices, management tools, evaluation criteria, review time intervals which are to be implemented in the bank’s entire system. The policies are mostly reviewed on an annual basis except for sudden happenings that urge a quick response. Although banks still play the most vital part in protecting themselves from unfavorable occurrences, bank regulators have their important responsibilities.

Banking in most countries falls under extremely strict supervision despite the increasing trend of liberalization and deregulation. Two main reasons are “banks