RIsk Management In Financial Institutions

Types of Risks Incurred by financial Institutions

A major objective of FI management is to increase the FI’s return for its owners. This often commes, however, at the cost of increased risk.

Risks Faced by Financial Institutions

  1. Credit Risk : the risk that promised cash flows from loans and securities held by FIs may not be paid in Full. 
  2. Liquidity Risk : the risk that a sudden and unexpected increase in liability withdrawals may require an FI to liquidate assets in a very short period of time and at low prices. 
  3. Interest Rate Risk : the risk incurred by an FI when the maturities of its assets and liabilities are mismatched and interest rates are volatile.
  4. Market Risk : the risk incurred in tarading assets and liabilities due to changes in interest rates, exchange rates, and other asset prices.
  5. Off-Balance -Sheet Risk : the risk incurred by FI as the result of its activities related to contingent assets and liabilities.
  6. Foreign Exchange Risk : the risk that exchange rate changes can affect the value of an FI’s assets and liabilities denominated in foreign currencies.
  7. Country or Sovereign Risk : the risk that repayments by foreign borrowers may be interrupted becouse of interference from foreign governments or other pollitical entities.
  8. Technology Risk : the risk incurred by an FI when its technological investments do not produce anticipated cost savings. 
  9. Operational Risk : the risk that existing technology or support systems may malfunction, that fraud may occur that impacts the FI”s activities , and/or external shocks such as hurricanes and floods occur.
  10. Insolvency Risk :the risk that an FI may not have enough capital to offset a sudden deccline in the value of its assets relative to its liabilities.

Source : Financial Markets And Institutions, Saunders/ Cornett

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