Types of Risks in Banking

Pregunta	Respuesta
Types of risks	1. Credit risk 2. Liquidity risk 3. Interest rate risk 4. Market risk 5. Country risk 6. Solvency risk 7. Operational risk
Credit risk	Risk of payment default/delays and/or deterioration in credit quality.
3 main principles of credit risk management	1. Selection 2. Limitation 3. Diversification
Credit standing decreases	1. Increase in interest rates on debt issues 2. A decrease in share price 3. A decrease in debt quality
Liquidity risk	Risk of not being able to raise liquidity or of raising liquidity at a high cost
Major Reasons Banks Need Liquidity	1. Cushion to replace net cash outflows. 2. Compensate for the non-receipt of expected cash inflows. 3. Source of funds to undertake new transactions and for contingent liabilities.
Factors Influencing Choice of Sources of Liquidity	1. Purpose of liquidity needed 2. Access to liquidity markets 3. Management strategy 4. Costs and characteristics of liquidity sources 5. Interest rate forecasts
Interest rate risk	Risk of loss incurred due to the exposure of banks' profits to interest rate changes and unmatched balance sheets.
Interest rate RISE expected	Make ASSETS more interest-sensitive
interest rate FALL expected	Make LIABILITIES more interest-sensitive.
Matching of asset and liability sides	1. to minimise interest rate exposure. 2. classifying assets and liabilities according to their interest rates. 3. to show how each side is related to particular interest rates. 4. to show how it is exposed to changes in market rates.
Factors of Imperfection in Matching	1. uncertainty that banks' borrowing costs in all cases will move in step with market rates. 2. some risk has to be accepted to accommodate clients. 3. some risk is unavoidable.
Market risk	Risk of loss associated with adverse deviations in the value of the trading portfolio.
Increased size and activity of trading portfolios	Greater exposure to market risk
Value-at-Risk (VaR)	Maximum loss on a portfolio occurring within a given length of time with a given small probability.
Purpose of VaR	To calculate the worst event for a bank under unexceptional market conditions.
Parameters for VaR	1. Horizon over which returns are calculated. 2. Percentage specified by the bank official.
Assumption for VaR distribution	Well-diversified portfolio, so there's only market risk.
Backtesting	Actual daily trading gains or losses are compared to the estimated VaR over a period. To assess the validity of VaR.
Questionable accuracy of VaR	Quantile - very extreme events - likely to be the least accurately estimated.
Country risk	1. Sovereign risk 2. Transfer risk
Sovereign risk	1. Risk of default by a sovereign government on its foreign currency obligations. 2. Risk that sovereign actions may affect the ability of other local entities to meet their obligations.
Unique country-risk assessment system	1. to signal potential problems before they occur. 2. to minimise exposure to countries with low or decreasing ratings.
Credit risk of national governments	1. economic risk (ability) 2. political risk (willingness)
Transfer risk	1. risk that the government cannot secure foreign exchange to service its foreign currency debt. 2. likelihood that the government may restrict non-sovereign issuers' access to foreign exchange.
Consequence of restricting issuer's access to foreign exchange.	prevents the issuer from meeting its foreign obligations in a timely manner.
Solvency risk	risk of having insufficient capital to cover losses generated by all types of risks.
Operational risk	risk arising from shortcomings/deficiencies at either a technical level or an organisational level.
Basel Committee's definition of operational risk	"the risk of direct/indirect loss resulting from inadequate or failed internal processes, people, and systems or from external events".
Management of operational risk	1. separation of the risk takers from the risk controllers. 2. formulate business rules which create incentives for employees to disclose risks rather than conceal them.
Why separate risk takers from risk controllers?	Risk takers have an incentive to take on additional risk in order to generate business and profitability and thus, risk should be controlled by a separate unit.
Case Study for Operational Risk	Nick Leeson of Barings

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	Creado por Dhanhyaa Mahen hace más de 6 años