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The Concept of Risk

Banks face a variety of risks due to their activities involving borrowing, lending, interest rates, foreign exchange, investments, and derivatives. The main risks banks face are interest rate risk, market risk, liquidity risk, credit risk, currency risk, counterparty risk, and operational risk. Risk can be defined as the uncertainty of future outcomes and the probability of adverse events. Proper risk management is important for banks to maintain solvency, as inadequate management could threaten their stability. Risks can be classified as systematic, unsystematic, financial, or non-financial.

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Mickaela Gulis
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53 views3 pages

The Concept of Risk

Banks face a variety of risks due to their activities involving borrowing, lending, interest rates, foreign exchange, investments, and derivatives. The main risks banks face are interest rate risk, market risk, liquidity risk, credit risk, currency risk, counterparty risk, and operational risk. Risk can be defined as the uncertainty of future outcomes and the probability of adverse events. Proper risk management is important for banks to maintain solvency, as inadequate management could threaten their stability. Risks can be classified as systematic, unsystematic, financial, or non-financial.

Uploaded by

Mickaela Gulis
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Risk in banking

Learning outcomes:

After studying this text the learner should / should be able to:

• Elucidate the concept of risk.

• Evaluate the various risks with which banks contend.

• Comprehend the import of risk mitigation techniques.

Introduction

By virtue of borrowing and lending for various periods, at various rates of interest,
engaging in many other interest rate-related activities, dealing in foreign exchange,
undertaking different investments, dealing in the derivatives markets, etc, banks are exposed
to an array of risks like no other institution. The risks faced by banks are usually identified in
the statute/s relating to banks in many countries, and

Follows as:

• Interest rate risk.

• Market risk.

• Liquidity risk.

• Credit risk.

• Currency risk.

• Counterparty risk.

• Operational risk.
THE CONCEPT OF RISK

- It is the probability that some future event could adversely impact the organization.
Risk measure in terms of probability and impact.
- Risk is exposure to the probability of loss, injury, or other adverse or unwelcome a
chance or situation involving such a possibility.
- Risk is inheret in every business, organizations and entrepreneurship need to be
willing to take risk as without risk their can be no meaningful gain. Like stress one
has to live with risk and it cannot be avoided. At best risk can be manage and
mitigated.

RISK - is usually defined as the uncertainty of future outcomes or the probability of an


adverse outcome. It is usually measured as the volatility or standard deviation of returns
around the mean return. Profitability is therefore dependent on the management of risk, and
it will be obvious that inadequate risk management could threaten the solvency of the
financial intermediary.

CLASSFICATION OF RISK

SYSTEMATIC RISK

- It is not fully uncontrollable by an organization.


- It is not merely predictable.
- It is usually a macro nature
- It usually affects a large number of organizations operating under a similar stream.
- It cannot be fully assessed and anticipated in advance in term of timing and gravity.
- The example of such type of risk is, Interest Risk, Market Risk, Purchasing Power
Risk.

UNSYSTEMATIC RISK

- It is usually controllable by an organization.


- It is reasonably predictable.
- It is normally micro in nature.
- If not manage directly affects the individual organization first.
- It can be usually assessed well in advance with reasonable efforts and risk mitigation
and can be planned by proper understanding and risk assessment techniques.
- The example of such Risk are compliance risk, Credit risk and operational risk.
FINANCIAL RISK – The risk which has some direct financial impact on entity is treated as
fincial risk.

NON – FINANCIAL RISK – This type of risk do not usually have a direct and immediate
financial impact on the business, but the consequences are very serious and later do have
significant financial impact if these risk are not controlled at the initial stage

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