Question

What are the principal sources of risk facing a bank manager?

Answer 1

Ans: Pricipal Sources of risk faced by the bank manager:

1) Credit risk : Banks give loans to companies and charge interest based on their cost of funds and risk premium. Default risk is associated with this called as credit risk that will be a major blow for banking business.

2) Market risk : Banks deal in securities , equities, currency exchange, commodity risk as bank is exposed to risk associated with these derivatives that can be fatal if exposure is higher.

3) Operational risk : Any technical glitch, fraud by employee or external or any other operational related issue like non compliance will make it heavy penalty or loss on to the banking company.

4) Liquidity risk : It can arise when bank is having issues with their securities are not easily liquidated or liquidation take long time, may arise a risk of bank to default, as the demands would not be entertained.

5) Reputational risk : Potential loss in reputational capital due to rumors, unknowing non compliance, bad customer serviceor anything that is ruining the brand of a bank.

6) Business Risk : Risk related to banking business if profits are lower than its liabilities, difficult to repay its liability will make it fail like any other company.

7) Systemic Risk : Risk associated with the industry failure , this term arises mainly after the 2008 crisis, when whole banking financial system , where many institution lost all their value.