Banks – The Risks Faced By Them

Banks – The Risks Faced By Them

Any organization which has an objective of profit maximization holds a particular degree of risk. Banks to face various risks because of the intermediary and payment function they perform.  The changes in the banking environment have led to an increase in pressure to maximize the value of shareholders.

Exposure to risk does not necessarily always mean loss. For instance, online trading of various securities involves quite a high amount of risk but the return is very high. The risk is mainly because of the market volatility in case of trading sector. But there too, you could keep a check on the risk involved if you choose online good trading platforms that assist you to make wise and calculated decisions.

Different types of risks that are associated with the banking sector

Exchange rate risk- There has been a considerable increase in foreign investments and multi-national firms because of the globalized markets and it, in turn, increased the political and foreign exchange risk. Duration analysis is used to do a comparison between the foreign bond value and the interest rates of domestic currency. Using gap analysis, one can measure the exposure to risk and it would be equal to the difference between liabilities and assets in each currency.

Market risk- It is the movement of risk in the various financial instrument’s price function which results in gain or loss in value. It is actually a speculative risk and is measured by probability in potential gain or loss in the portfolio. Here the risk could occur in 2 ways; systematic risk and unsystematic risk. The risk arising by the movement of the price of all the financial instruments because of macroeconomic climate changes is known as systematic risk.  Unsystematic risk arises when the instruments do not move as per the expectation because of internal factors related to the issuer. This risk could be easily offset by diversifying the investments into different industries or countries so that the risk is spread effectively to avoid any big loss in a specific sector.

Credit risk- It is the risk associated with failure to repay the loan by the counterparty either in full or in part.  This includes a default on loan agreement or delayed payments. It is the most damaging risk which a bank has to face and especially, for this reason, there is an entire credit department which helps in keeping this risk under control. The credit risk management is done by reducing the losses by building a strong portfolio with high risk and low-risk lending.

 

 

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