Question

Banks are exposed to various types of risk. Discuss any SIX (6) types of risk that could effect the bank’s position.

5 paragraph with examples . TQ

Answer 1

The following are the types of risk that could affect the bank’s position.

1. Credit risk : It occurs when there is default in the contractual obligations by borrowers or counter parties. Example : A borrowers default on a loan principal or interest.
2. Market risk : Market risk occurs from the fluctuations in the prices of the stocks in capital markets. This risk arises when the banks are active in capital markets.
3. Operational risk : Operational risk occurs when there are losses due to clerical errors, omissions or damages caused by the staff or systems. Example: Cheque cleared wrongly by the staff.
4. Liquidity risk : Liquidity risk arises when the bank cannot meet its funding obligations to the customers. Example : Customers may want to withdraw deposits and bank may not be able to arrange the funds.
5. Business risk : It deals with the risks arises due to the bank’s wrong strategy or inability to adjust with market dynamics, loss of market share etc.
6. Reputational risk : It is the risk of loss of reputation of banks. This will affect the banks' abilities to attract deposits from public. Example : ethical violations, security issues etc affects reputation