Question

What types risks are identified by banks that are of high priority to be actively addressed? Please explain.

Answer 1

It shall be noted that the banking system is the backbone of the economy's economic operations and growth.

There are various risks governing the banking system that are of high priority to be actively addressed.

They are:

1) Credit risk - It is the risk that arises from the possibility of non-payment of loans by the borrowers.

2) Market risk - The business of banking is intertwined with the business of capital markets and hence, is exposed to equity risk, forex risk, and commodity risk

3) Operational risk - Operational risk occurs as the result of a failed business processes in the bank’s day to day activities.

4) Moral hazards - If bank fails and they are bailed out, the losses are borne by taxpayers.

5) Business risk - It is the risk of choosing the wrong business strategy. As a result of this wrong choice, the bank may suffer losses and end up being acquired or may simply collapse.

6) Reputation risk - It is the risk of having a bad name in the market and losing customers due to poor and unfair trade & business practices

7) Liquidity risk - It is the risk that the bank will not be able to meet its obligations if the depositors come in to withdraw their money.

8) Systemic risk - It is the risk of the failure of one bank has the possibility to cause the failure of many other banks as well. This is because banks are counterparties to each other in a lot of transactions. Hence, if one bank fails, the credit risk event for the other banks becomes a reality.