Question

Banks are expose to a wide array of risks. Key among them are Credit risk, Market risk, Op- erational risk as stated by bank for Bank International Settlement in the Basel II Accord and reported by banks. Discuss these forms of risks. [25 marks]

Answer 1

Please find below the required answer for above given question:

1. Market Risk:

Market risk involves the risk of changing conditions in the specific marketplace in which a bank competes for business. One example of market risk is the increasing tendency of customers to avail online banking services. This aspect of market risk has presented significant challenges to traditional retail businesses. Banks that have been able to make the necessary adaptations to serve an online platform customer have thrived and seen substantial revenue growth while Banks that have been slow to adapt or made bad choices in their reaction to the changing marketplace have fallen by the wayside. This example also relates to another element of market risk i.e. the risk of being outmaneuvered by competitors. In an increasingly competitive global marketplace, often with narrowing profit margins, the most financially successful banks are most successful in offering a unique value proposition that makes them stand out from the crowd and gives them a solid marketplace identity.

2. Credit Risk:

Credit risk is the risk businesses incur by extending credit to customers. It can also refer to the bank's own credit risk with accountholders. A business takes a financial risk when it provides financing of purchases to its customers, due to the possibility that a customer may default on payment. A bank must handle its own credit obligations by ensuring that it always has sufficient cash flow to pay its accountholders in a timely fashion. Otherwise, accountholders may stop maintaining accounts with the bank. While managing risk is an important part of effectively running a business, a bank's management can only have so much control. In some cases, the best thing management can do is to anticipate potential risks and be prepared.

3. Operational Risk:

Operational risks refer to the various risks that can arise from a bank's ordinary business activities. The operational risk category includes lawsuits, fraud risk, personnel problems and business model risk which is the risk that a bank's models of marketing and growth plans may prove to be inaccurate or inadequate.