Risks in banking- We know banks are risky and taking risks is usually rewarded and economies and governments want banks to take risks but taking excessive risk means it won't take much for banks to fail. Going to focus on risks that come out of the asset transformation process

-Asset transformation and liquidity creation (transformation of illiquid assets e.g. real estate into very liquid liabilities e.g. deposits) This is the key role gives rise to interest rate risk (mismatch of maturities/duration) this is also maturity transformation and the mismatch gives rise to interest rate risk, market risk (risk associated with trading and trading activity; volcker rule that prohibits propriety trading, if rule is implemented it works then this is expected to be reduced liquidity risk (enter market to refinance and you can't so you need to unwind assets), insolvency/bankruptcy risk because they're making loans it gives rise to credit risk (people you lend to won't pay you back) off balance sheet risk can occur if you've issued too many commitments.

Other main function is delegated monitor role. If the central bank pushes money into the system but the banks hoard that money and don't lend monetary policy doesn't work

	Created by Nafisa Zahra over 10 years ago

University FINM3006 Note on FINM3006 w3, created by Nafisa Zahra on 06/03/2014.

FINM3006 w3