Risk mitigation refers to a variety of methods and measures that companies and banks can use to reduce their risks.
A distinction is made here between different risk categories such as credit risk, operational risk or liquidity risk. For example, the bank can reduce credit risk by accepting guarantees or collateral. These can be used to settle losses in the event of a loan default. The risk of payment defaults can also be reduced by so-called factoring, in which receivables are sold to a third party.
In the case of operational risk, on the other hand, risks can only be reduced to a certain extent. In this case, risk mitigation can be aimed at transferring risks to third parties, such as insurance companies or outsourcing providers. Here, however, it is important that the risk is effectively reduced by such a measure and not just in appearance. The bank must ensure that the collateral given has sufficient value and that the claims are enforceable.
