While regulatory compliance can help in ascertaining the safety of the financial system, compliance alone cannot curb any likely instances of financial distress or system failures.

Risk is defined as the unexpected variability of asset prices and/ or earnings. Risk is inherent in banking due to the process of maturity transformation and high leverage. Since banks cannot be risk avoiders, they have to master the science and art of risk management. Bankers' prudence needs to be the underlying tenet of banking operations so as to ensure safety of the depositors' funds, while optimally balancing risk-return relationship in the business of financial intermediation. The modern-day banking is all about judiciously managing risks, as efficiency cannot be sacrificed in the name of safety. In addition to the inherent nature of risk, several recent and past events have brought out various new dimensions of risks in banking. Importance of regulatory compliance has also increased manifold with regulations getting more broad and stringent. The goal of risk management, therefore, is not to eliminate risk but to increase the value of the bank through a robust and well-calibrated risk management strategy, while ensuring regulatory compliance in letter and spirit.

An orderly and stable financial system is the basic foundation for economic development and growth. A sound and resilient banking sector, well-functioning financial markets, dynamic liquidity management and efficient payment and settlement infrastructure are the prerequisites for financial stability. Financial stability is a situation in which the financial system ensures efficient and smooth inter-temporal allocation of resources from savers to investors, reasonably prices the forward looking-financial risks, and comfortably absorbs financial and real economic shocks. Accordingly, risk management architecture in the financial sector has assumed greater significance in view of the increasing volumes and complexities of financial transactions and possibility of instability. Developing a robust and secure financial infrastructure is a key component of financial stability.

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