Chapter 7 Flashcards
why does credit ratings impact cooperatives more than publicly traded banks
publicly traded bank: has an extra source of liquidity that co-ops dont have
what is interest rate risk
when maturities of assets (loans) and liability (deposits) are mismatched
what is the difference between refinancing risk and reinvestment
refinance: loans are greater than deposits
reinvestment: deposits are greater than loans
in terms of reinvestment what happens if interest rate goes up?
it will cost you more, have to pay interest expense on deposits
in terms of reinvestment, what happens if interest rate goes down?
it will make you less money, mortgages are paying less interest to you
what is reinvestment risk
the risk of having to settle for a lower return when you reinvest your money.
what is credit risk
risk that borrower wont pay back loan (will default)
what are the different types of credit risk
-firm-specific credit risk: risk default that happens because of firm-specific activities
-systematic credit risk: risk default associated with economy affecting all borrowers (covid)
what is liquidity risk
the sudden outflow of deposits in an FI, might leave them in a position to liquidate their assets for very low in a short period
what is foreign exchange risk
risk that fluctuation in exchange rate can affect the value of an FI’s assets and liabilities in foreign currencies
what is sovereign risk
risk that repayments from foreign borrowers may be interrupted because of foreign government
what is market risk
systemic shock, due to changes in interest rates; value of an investment will go down due to changes in the overall market.
what is an off balance sheet risk
risk incurred by an FI due to activities related to contingent assets or liabilities, ex: a pre-approved line of credit that is not used
what is technology risk
when tech investments do not produce the savings anticipated (includes not embracing new technology)
what is operational risk
risk that existing technology may malfunction or break down (includes employee fraud/errors)
what is economies of scale
doing something over and over again, avg cost of producing financial services fall while outputs of services increase
what is economies of scope
how many other products can i offer (client has mortgage, you also want their checking account, etc)
what is digital disruption and fintech
finance and technology; technology enabled innovation in financial services.
Can result in loss business for FI
ex: apple pay, crypto currency
what is insolvency risk
risk that an Fi wont have enough capital to offset a sudden decline in assets
what are interaction of risks
interdependencies among risks: one risk brings about another risk (interest rate)
discrete risk: does not bring upon another risk (theft)
