Types of Risk - Banking Flashcards
What are the types of banking risks identified by the Basel 3 Accords?
- Credit risk
- Market risk
- Operational risk
- Liquidity risk
What is credit risk?
Risk that a bank borrower (counterparty) fails to meet its obligations e.g. pay interest on a loan or repay the amount borrowed.
In which book does credit risk mainly apply to?
Banking book
What is market risk?
Risk of losses to the bank arising from movements in market prices as a result of changes in:
- interest rates
- exchange rates
- commodity prices
- equity prices
In which book does market risk mainly apply to?
Trading book
What is operational risk?
Risk of loss arising from inadequate or failed internal processes, people, and systems or loss from external events.
Is legal risk considered part of operational risk?
Yes
Is strategic and reputational risk considered part of operational risk?
No
What is liquidity risk?
Risk that banks may not be able to meet their obligations to repay depositors and other funding obligations or to continue financing assets.
What is systemic risk?
The risk that the entire banking system may face losses or even collapse with all banks affected. This can occur due to monetary or macroeconomic effects e.g. currency devaluation, failure of a single ‘systemically important’ financial institution.
What is business risk in the context of banking?
The potential for loss due to a decrease in the competitive position of the bank and the prospect of the bank prospering in changing markets.
What is reputational risk?
The risk arising from a decrease in the bank’s standing in public opinion.
What is compliance risk?
Risk of loss due to failure to comply with laws and regulations or with internal policies and procedures.
