Types Of Risk In Banking, Download Free PDF

Types Of Risk: Risk is an inherent part of all personal and business decisions. Whether it is in an investment, a business, or a project, there are risks associated with your outcome. The more you understand the different kinds of risks, the better you will be in managing them appropriately and making wise decisions. Based on the nature of risk and the domain affected, there are several broad categories in which risks fall. Here we are providing some types of risk in banking candidates can check the details knowledge in the article below:

Market Risk

Market risk is the potential loss of money due to adverse shifts in the financial markets. It impacts stocks, bonds, commodities, and even currencies. Market risk is further divided into:

Equity Risk: This is the kind of risk associated with price fluctuations within the stock market.
Interest-rate risk is the risk that will have an alteration in interest rates as affecting bond prices or loan interest rates.
Currency Risk or Foreign Exchange Risk: It arises from the exchange rate fluctuations to investments in foreign currencies.
Commodity Risk: There is a risk of price fluctuation of commodities, such as crude oil and gold, or agricultural products.

Credit Risk

Credit risk is the inability or unwillingness of the borrower to repay the loan or meet contractual obligations it. This type of risk causes major concern to lenders, banks, as well as investors in debt instruments like bonds. Credit risk types are as follows:

Default Risk: This credit risk type arises due to an inability on the part of the borrower to return the principal or interest amount.
Counterparty Risk: The risk that the other party of a financial transaction may not be able to perform its obligation.

Operational Risk

Operational risk occurs when there is the possibility of failure in a firm’s people, processes, and systems. It can arise from a wide spectrum of sources that include:

Process Failures: Inefficiencies or breakdowns in operations such as supply chain disruptions
Human Error: Errors due to wrong decisions by employees or management that can be clerical errors
System Failures: Any kind of technical failure like IT system breakdowns or cybersecurity breach
External Events: External events like natural disasters or regulatory changes.

Liquidity Risk

Liquidity risk is defined as the probability that an entity may not be in a position to meet short-term financial obligations due to failure to liquidate assets quickly into cash. Two possible liquidity risks are:

Funding Liquidity Risk: The risk is that a company or an individual may not have enough liquid assets to meet financial commitments.
Market Liquidity Risk: This is the risk that fails to ensure that security can be traded quickly in the market to avoid or minimize a loss.

Systemic Risk

The possibility of a general collapse in an entire industry or financial system due to the failure of one entity or group of entities is generally described as systemic risk. This type of risk was broadly portrayed during the 2008 financial crisis, where the failure of only a few big financial institutions led to several economic problems.

Country Risk

The country risk is the potential loss or negative impacts which occur as a result of investments, business opportunities, or financial activities due to the macro-economic, political, and social influence that occur within a specific country. This type of risk factor is primarily related to international investments, trade, and business opportunities and differs from one country to another based on stability, governance, and market situations.

Unsystematic risk

The unsystematic risk is also referred to as specific risk or idiosyncratic risk. It refers to a risk in which investment may become worthless due to a particular company, industry, or sector instead of the general market. This is that kind of risk, which can be diversified or even wiped out since the risk arises in a unique asset, company, or industry and affects the remaining rest of the market.

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