Question

risk faced by commercial bank

a what dors it mean for banks to face liquidity risk?

b list three diffrebnet ways in which banks manage liquidity ridk

c what is bank leverage? explain why having high leverage ratio can be a source of risk for banks

d name onne other kind of risk faced by banks, explain why it is risk

Answer 1

When banks face liquidity risks they ar eon verge of insolvency or bankruptcy due to depleted liquidity and cash reserves.

Banks manage liquidity risks by cross netting, hedging, arbitrage opportunity and through foreign commercial borrowing in short term to finance the debt.

Bank leverage is the net debt banks have in proportional to its capital. High leverage ratio is hugher risk as banks have to ibfuse more capital to clear off its debt and else banks can go insolvent for non clearance of its debt which can ultimately cause huge economic losses to country.

Banks also face market risks due to global uncertainty and hypercompetition as well as government regulation, labor unions, taxation, etc.