risks in banking operations
Transcript of risks in banking operations
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RISKS
Possibility that an investment's actual returnwill be different than expected; includes the
possibility of losing some or all of theoriginal investment.
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BANKING RISK
Banking is a risky business, and bankingorganizations have identified many riskfactors in the financial services environment
including;
Credit risk,
Market risk,
Liquidity risk,
Operational risk.
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OPERATIONAL RISK
What is operational risk?
risk that external events or deficiencies in internalcontrols or information systems will result in an
economic loss-whether the loss is anticipated to
some extent or entirely unexpected.
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VARIOUS RISKS IN BANKING OPERATIONS
A bank refers to a financial institution which actsas payment agent for customers by borrowing and
lending money. The banking operations feature the
following risks:
The borrowers can default taking away the
bank's money The changing economic environment can pose a
risk for banking operations as they govern the
interest rates. The regulatory institutions pose a risk to the
banking operations with their regulations The quality of loan
Aging ownership groups
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DIAGRAMIC VIEW OF BANKING RISKSBanking Risk Exposures
Balance sheet
structure
Income statementstructure/
profitability
Credit risk
Capital adequacy
Interest rate risk
Market Risk
Currency risk
Liquidity risk
Financial Risks Business Risks
Legal risks
Financial
Infrastructure
Macro
Policy risks
Systemic
(Country) risk
Event Risks
Political risks
Other
exogenousrisks
Banking crisis
risk
Contagion risk
Operational Risks
Business strategy
risk
Internal systems
and operational
risks
Technology risk
Mismanagement
and Fraud
Reputational
Risk
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OTHER BANKING RISKS
1. SOLVENCY RISK
Solvency riskis the riskthat a creditor
will lose his entire investment if a debtorcannot repay him in full, even if all the
debtors assets are liquidated. Traders
call this counterparty risk.
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LIQUIDITY RISK
The riskthat arises from the difficulty ofselling an asset. An investment maysometimes need to be sold quickly.
Unfortunately, an insufficientsecondary market may prevent the
liquidation or limit the funds that can be
generated from the asset.
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CREDIT RISK
Credit risk is risk due to uncertainty in acounterparty's (also called an obligor's or
credit's) ability to meet its obligations. Becausethere are many types of counterpartiesfrom
individuals to sovereign governmentsand
many different types of obligationsfrom autoloans to derivatives transactionscredit risk
takes many forms.
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INTEREST RATE RISK
The possibility of a reduction in the value ofa security, especially abond, resulting from a
rise in interest rates. This riskcan be reduced
by diversifying the durations of thefixed-incomeinvestments that are held at a
given time.
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PRICE RISK
Probability ofloss occurring from adversemovement in the market price of an asset.
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Components of Operational Risk
Core operational capability
People
Client relationships Transactional and booking systems
Reconciliation and accounting
Change and new activities Expense and revenue volatility
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Operational Risk Process Models
Establish objectives and requirements of keystakeholders
Identify core processes
Define performance and risk metrics
Implement organizational and risk mitigationstrategies
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