Risks In Banking Operations

RISKS IN BANKING OPERATIONS

Created by Kaleem Ullah Khan E.MAIL: [email protected]

RISKS

• Possibility that an investment's actual return will be different than expected; includes the possibility of losing some or all of the original investment.

BANKING RISK

• Banking is a risky business, and banking organizations have identified many risk factors in the financial services environment including;

Credit risk, Market risk, Liquidity risk, Operational risk.

OPERATIONAL RISK • •

What is “operational risk?” “risk that external events or deficiencies in internal controls or information systems will result in an economic loss-whether the loss is anticipated to some extent or entirely unexpected.”

VARIOUS RISKS IN BANKING OPERATIONS

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A bank refers to a financial institution which acts as 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

DIAGRAMIC VIEW OF BANKING RISKS Banking Risk Exposures

Financial Risks

Operational Risks

Business Risks

Event Risks

Balance sheet structure

Business strategy risk

Legal risks

Political risks

Macro Policy risks

Contagion risk

Financial Infrastructure

Banking crisis risk

Systemic (Country) risk

Other exogenous risks

Income statement structure/ profitability

Internal systems and operational risks

Capital adequacy Credit risk Liquidity risk

Technology risk

Mismanagement and Fraud

Interest rate risk Market Risk Currency risk

Reputational Risk

OTHER BANKING RISKS

1.

SOLVENCY RISK Solvency risk is the risk that a creditor will lose his entire investment if a debtor cannot repay him in full, even if all the debtor’s assets are liquidated. Traders call this counterparty risk.

LIQUIDITY RISK • The risk that arises from the difficulty of selling an asset. An investment may sometimes need to be sold quickly. Unfortunately, an insufficient secondary market may prevent the liquidation or limit the funds that can be generated from the asset.

CREDIT RISK • Credit risk is risk due to uncertainty in a counterparty's (also called an obligor's or credit's) ability to meet its obligations. Because there are many types of counterparties—from individuals to sovereign governments—and many different types of obligations—from auto loans to derivatives transactions—credit risk takes many forms.

INTEREST RATE RISK • The possibility of a reduction in the value of a security, especially a bond, resulting from a rise in interest rates. This risk can be reduced by diversifying the durations of the fixed-income investments that are held at a given time.

PRICE RISK

• Probability of loss occurring from adverse movement in the market price of an asset.

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

Operational Risk Process Models • • • •

Establish objectives and requirements of key stakeholders Identify core processes Define performance and risk metrics Implement organizational and risk mitigation strategies