what are MARKET RISKS (Question: 121985.0 )

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Abhishek Nath

· commented

· 1 Months ago

See, there are three kinds of risks in the banking -
1. Credit Risk - It is the risk of the borrower not repaying back the loan or credit to his creditor (the bank). This whole situation is called "Credit Default", and the person who fails to pay is the "Defaulter". For ex - the whole sub-prime crisis started in 2008 because there were many defaulters and the banks were exposed to the Credit Risk

2. Market Risk - It is mainly the risk due to the market prices volatility. For ex- It was due to the sub-prime crisis in 2008 that many banks went into losses. How? Because the share prices fell, the bond yields increased, banks were exposed to Market Risk. This may include -
i. Equity Risk
ii. Interest Rate Risk
iii. Currency Risk
iv. Commodity Risk

3. Operational Risk - These are risks due to pure internal system of the banking firm. It may be due to external factors as well. For ex - After the 9/11 attacks banks like NAB, AIB, UBS went into rogue trading losses. It was actually since then that Operational Risk was taken seriously in Banking. This may include - Improper management, Improper planning, Staff fraud, System failure, Increased Competition. In many Hollywood films, we have seen the villains hacking the banking software to take money out of the bank, that is an operation-risk as well...

Hope this helps.. :)

what are MARKET RISKS (Question: 121985.0 )

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