Question

In your own words, explain via the use of examples, the following commercial bank risks as well as their impact on commercial banking activities:

i. Reputational risk

ii. Country (i.e., Sovereign) risk

(400 words)

Answer 1

SOLUTION

I)REPUTATIONAL RISK AND THEIR IMPACT ON COMMERCIAL BANK ACTIVITIES

Reputational risk in banking and financial services is associated with the possibility of loss in the going concern value of the financial intermediary- the risk adjusted value of expected future earnings. Reputational losses may be reflected in reduced operating revenues as clients and trading counterparties shift to competitors, increased compliance and other costs required to deal with the required problem-including opportunity costs-an increased firm-specific risk percieved by the market. Reputational risk is often linked to the operational risk, although there are important distinctions between the two. Operational risks are associated with the people, products , business practices, employment practices,internal practices, systems, external events and workforce. Operational risk is specifically not considred to include strategic and business risks, credit risks, market risks or systematic and reputational risk. If reputational risk is bracketed out from the operational risk from a regulatory perspective, then what it is ? .

examples: Adverse events typically associated with reputation risk include ethics violations, safety issues, security issues, lack of sustainability, poor quality ar unethical innovation. Corporate trust and relations often have an impact on the degree of reputation a business will experience.

II) COUNTRY RISKS (SOVERIEGN) AND THEIR IMPACT ON COMMERCIAL BANK ACTIVITIES

Country risk is the risk that a foriegn government will default on its bonds or other financial commitments. Country risks also refer to the broader notion of the degree to which political and economic unrest affect the securities of issues doing business in a paricular country. Political and economic stability are two of the biggest reasons countries default on their bonds, so the question of determining country risk is at least partially a matter of comparing these factors of Canada and Nigeria. Analysis scrutinize tax systems, the influence of certain political parties, evidence of corruption, inflation rates, education systems, demographics, and a wide range of other factors to predict and determine sources of instability.

Country risk is a concern because political and economic unrest create volatility. Inturn investors demand high returns as compensation for this added risk. As you can imagine Canada would have less much country risk than Nigeria but, in exchange of this peace of mind, Canadian bonds will yield less than the Nigerian bonds. As a result, the presence and degree of country risk makes it more expensive for many emerging economies or struggling countries to borrow money.

examples: Examplees of countries having peak country risks include Afganistan, Algeria, Belarus, Burundi, Camaroon, Central African republic, Chad and China