Question

Write down the ten types of risks that FIs face. Give a brief discussion of all of them.

Answer 1

Financial Institutions have to take risk all the time. risk gives return. however the more risk more return and less risk less return as compared to more risk. The Financial Institutions has to take risk to make money. The followings are the types of risk that Financial Institutions face.

1. Credit Risk: Credit risk as the potential that a Financial Institutions( FI's) borrower party will fail to meet its Payment obligations . it include both certainty and uncertainty
2. Market Risk: Market Risk as the risk of losses in or off balance sheet position that arise from investment due to movement in market price. the Major components of Market risk includes: Equity Risk , and Commodity risk.
3. Interest rate risk: it is the potential loss due to movements in Interest rates. the risk arises because a Financial Institutions assets usually have a significantly long term maturity value than its liabilities. It is also called as Assets Liability management.
4. Foreign Exchange Risk: it is the potential loss created due to change in the value of Assets or liabilities resulting from exchange rate fluctuation.
5. Operational Risk: it is the risk associated with work environment as the risk of loss resulting from failed or inadequate process, people , internal and external events. it includes legal risk but excludes strategic risk.
6. Liquidity Risk: it is the risk associated with the working capital. it has the ability to meet payment obligations of day to day activities. which Financial Institutions have to bear. so liquidity risk is  the risk of a Financial Institutions not being able to have enough cash to carry out its day to day operations.
7. Business Risk: it is the risk arising from a Financial Institutions long term business Strategy . it deals with a Financial Institutions  not bale to keep up with changing and chase competitions falling short in somewhere.
8. Goodwill Risk: it is the risk associated with brand name , goodwill and Public standing that occurs due to some dubious actions taken by Financial Institutions. sometimes this fame will hamper due to negative action or any solid evidence and wrong doing.
9. Systematic Risk: it refers to the risk that the entire system might come to a standstill. it can also be stated as the possibility that default or failure of other financial institutions. like Lehman brothers collapse.
10. Moral Hazard: moral hazard refers to a situation where a person or group is likely to have a tendency to take a high level of risk even its economically unsound.in simple term too-big -to fail.