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
- Credit Risk : the risk that promised cash flows from loans and securities held by FIs may not be paid in Full.
- 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.
- Interest Rate Risk : the risk incurred by an FI when the maturities of its assets and liabilities are mismatched and interest rates are volatile.
- Market Risk : the risk incurred in tarading assets and liabilities due to changes in interest rates, exchange rates, and other asset prices.
- Off-Balance -Sheet Risk : the risk incurred by FI as the result of its activities related to contingent assets and liabilities.
- Foreign Exchange Risk : the risk that exchange rate changes can affect the value of an FI’s assets and liabilities denominated in foreign currencies.
- Country or Sovereign Risk : the risk that repayments by foreign borrowers may be interrupted becouse of interference from foreign governments or other pollitical entities.
- Technology Risk : the risk incurred by an FI when its technological investments do not produce anticipated cost savings.
- 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.
- 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