The reasons for the different types of risks faced by banks

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The reasons for the different types of risks faced by banks

one of the most misunderstood terms, especially when it comes to one banker, is that the small word "risk." Risks and banking seem to go together just like automatically side with the glove or pairs Jack with Jill.

in the function of "08," the global financial crisis, and put the word "danger" and the "Bank" conjures up an image together until homogeneous Bank storming economy wreaking havoc as it goes.

This picture is of course not entirely fair. Exposed banks, like any other company or even individuals to many different forms of risks. Banks also in itself is a source of a number of risks as well. But this is beyond the scope of our present.

This article will explain what the risk is and some of the different types of risks faced by banks and other financial institutions in the business daily activities.

Let's start our journey with a visit to the dictionary. Once upon a time it meant a trip to the bookshelf, but today thanks to the wonders of "the word" technology is accessible to them. "Risk" definition of being "exposure to the chance of injury or loss" is a typical (with thanks for Dictionery.com).

There may be other differences on this subject, but what we have is good enough. Key elements in the "danger" is exposure to CHANCE of loss . In other words, the probability that something cause financial or other loss. This is the basis for understanding the different types of risks faced by banks.

Let's take a look at a traditional bank. In its simplest form it is very, banks take deposits and lend in the form of loans. The borrower does not let loose his or her loan the bank must cope with credit risk. This is the possibility that the borrower will not be able to pay the amount due. Credit is the absolute risks. It's a chance that the borrower will not be able to repay the loan. Credit risk means bankruptcy.

Liquidity risk is on the other hand, is not absolute. Is the possibility that the borrower will not be able to make payment of the amount owed at the time is appropriate. However, the reason for this may be timing issues. This does not mean that the borrower is insolvent as he may be able to repay the loan at a later date.

between them, and the risk of credit and liquidity risk are the major business risks faced by the banks because they are part and parcel of the banking business.

In recent years there has been a growing realization that operational risks are another source of risk for a bank. This sound and shape given in the Basel Accords, where operational risk is defined as "the risk of direct or indirect loss resulting from inadequate internal processes or failed, people and systems or from external events."

and operational risks can be divided into seven distinct categories. Below we examine each of these categories and briefly explain what are the risks they cover types.

  • internal fraud. This generally covers fraud by bank employees such as asset theft, and theft of customer information, to cover up mistakes, mismarking deliberate positions, bribery etc.

  • external fraud. where non-bank staff involved in such as computer hacking, theft from a third party and forgery.

  • employment and safety practices in the workplace. discriminatory personnel policies, workers' compensation claims, and health and safety issues employees.

  • customers, products and doing business. This is a very broad field and normally includes market manipulation, and antitrust issues, and business activities, improper and disadvantages of banking and credit products breaches, account churning. Subprime disaster is a clear example of a product defect.

  • damage to physical assets This includes things such as natural disasters, terrorism and sabotage - anything that leads to actual damage or destruction of physical property Bank

  • disrupt business and the failure of systems. power outages and computer software and hardware failures. Hurricane or flood the banking services that disrupted also falls into this category.

  • implementation, delivery and operations management. This includes things such as data capture errors, accounting errors and the failure to meet the preparation of legal reporting requirements, and the loss of the neglect of client assets.

There are other risks as well, such as legal, reputation, market - and the list goes on. But that is another story (and probably last) article.

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