RISK IN MERGER AND ACQUISITION

MERGER AND ACQUISITION: MANAGEMENT OF RISK – APPROACH AND PROCESS: USING THE BANKING INDUSTRY AS A REFERENCE

In recent years a remarkable evolution has taken place in the financial services marketplace. Modern portfolio theory and financial engineering have transformed the way risk is viewed and managed in virtually every niche of the financial services sector. In commercial banking, risk management has been transformed from a rather narrow focus on asset liability management, to a focus on the management of risk on an enterprise-wide basis.

This change in focus has had significant impacts on the role and responsibilities, and potential liabilities, of boards of directors and senior management. The management of risk has become a critical part of standards by which their stewardship is evaluated by shareholders and regulators.

The business of banking has always been primarily about intermediation, requiring the management of a variety of attendant risks. However, the kind of risks faced by banks today and how those risks are managed are being driven in new directions by a number of dynamic forces.

These include the development of new and increasingly complex products; the convergence of banking, securities and insurance; the expanding role and importance of technology; the globalization and volatility of markets; and the pressure of investor expectations. Each of these forces, as well as others, have brought the management of risk more to the forefront of the issues faced by both money center and community bankers.

The marketplace has been the driving force in risk management. From the money center banks actively dealing in derivatives products globally, all the way to the community bank on Main Street, the management of risk is taking on new meaning in the context of day-today business. Today, risk management involves sophisticated risk identification analysis, monitoring, reporting and management techniques.

Since banking is one of the most regulated of businesses, it is natural that risk management would have an impact on the way federal and state authorities approach the regulation of banks. It continues to do so. Technology permits information and capital to travel quickly in today's markets, and the technology gap seems to be widening between regulators and the markets on almost a daily basis. In many significant ways, the marketplace has largely supplanted "command and control" approaches toward bank regulation

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