Question

Where do bank risks come from? What can we do about the risks?

Answer 1

Bank risks come from operating into the market. since the bank has to operate in an economy under certain rules and regulation,they are exposed to a number of Risk. they could be as follows-

1. Credit risk -it arises from a lot of bad loans which Bank lend to its borrowers and when those loan turn bad it has to write off into its book of its accounts. credit risk means that repayment of principal is not possible by the borrower.

2. Interest rate risk-these risks are are related to interest rate changes during the monetary policy of Central Bank.Central Bank often control the money flow into the economy by cutting or raising interest rates and bank has to be the intermediaries to deal with it.

3. Operational risk-this type of risk are related with various type of operation which a Bank undertakes and it could be leading to various kinds of losses.

4. Market risk -these are the economy related risk for operating into an economy and this cannot be completely eliminated by any company. so these are the risks, a bank cannot hedge itself from. A bank needs to to diversify portfolio in order to negate such risk.

5. Litigation risk-these are the various compliance risk due to change in the rules and regulation by the regulating authority and bank has to comply with them.

This risks can only be minimised through proper management of the portfolio of the loans and rates which are equivalent with the deposits and the lending, so that the bank does not find itself into such uncomfortable position that it is unable to meet with it's repayment schedule with its borrowers or it should not lend such loans that the loan becomes bad and the recovery is impossible.Better risk management strategy need to be adopted while lending the credit to the borrower and the creditworthiness of the borrower must be checked into, in order to prevent any kind of misadventures.