Contents
1. Banking Services & Financial services
2. Banking and Financial Risk
3. FRM
4. Types of Risk
4.1 Market Risk
4.2 Business Risk & Non- Business Risk
4.3 Reputational risk
4.4 Credit Risk
4.5 Liquidity Risk
4.6 Operational Risk
4.7 Systemic risk
4.8 Moral hazard
- Banking Services & Financial services
All the actions involved in accommodating and protecting money owned by other individuals and entities and then lending out this money to earn a revenue is called banking services. And therefore banking service is said to be an end-to-end process guarantee the overall implementation of a financial service. Whereas, the financial services sector includes investments, insurance, redistribution of risk, and other financial activities to earn income through fees and commissions.
- Banking and Financial Risk
Risk can be referred as the chances of having an unforeseen or unhelpful outcome. Any action or movement which show the way to loss of any type can be expressed as risk. Therefore Banking and Financial Risk is one of the main anxieties of every industry and business from corner to corner fields and topographies. So we must take a careful and practical risk management which can help banks to improve profits and keep going with smaller quantity of losses on loans and investments.
- FRM
Financial Risk Manager plays a vital role in understanding the risk arises in banking and financial services. Assessing in advance about the risk is the key role of FRM. So top most credential are gained by risk management professionals worldwide. So Financial Risk is said to be the base concept of FRM Level one exam. It is important to understand what are risk and the type of risk before understanding the techniques to control that risk and execute risk management.
- Types of Risk
4.1 Market Risk
Market risk occurs due to the movement in prices of financial instrument.
- Directional risk is caused due to movement in stock price and interest rates.
- Non-Directional risk is said to be unpredictability risks.
4.2 Business Risk & Non- Business Risk
Business endeavors will undertake business risk to maximize investor cost and profits such as companies undertake high-cost risks in marketing to launch a new product to gain higher sales. Non- Business risk are not under the control of firms such as risks that arise out of political and economic imbalances can be termed as non-business risk.
4.3 Reputational risk
Reputational risk is administrated by the Reputational Risk Framework, which was established to provide consistent principles for the identification, assessment and management of reputational risk issues. The reputation of Deutsche Bank which is a leading German bank with strong European roots and a global network which focuses on investment bank and in asset management. Remote events can challenge the trust and negatively impact Deutsche Bank’s reputation and it is most important to protect every employee of the Bank and risk associated with earnings, capital or liquidity arising from any association, action or inaction which could be perceived by stakeholders to be inappropriate, unethical or inconsistent with the Bank’s values and beliefs.
4.4 Credit Risk
When one fails to fulfill their obligations towards their counterparties credit risk arises and the classifications of credit risk are Sovereign Risk and Settlement Risk.
When one party makes the payment while the other party fails to fulfill the obligations then arise settlement risk.
4.5 Liquidity Risk
Liquidity risk happens out of an inability to implement transactions. Two type of liquidity risk are Asset Liquidity Risk and Funding Liquidity Risk.
Due to insufficient buyers or insufficient sellers against sell orders and buys orders created Asset liquidity
4.6 Operational Risk
It is the risk happened out of mismanagement or technical failures in operation.
Lack of controls create Fraud risk
Inaccurate model application results in model risk.
4.7 Systemic risk
Complex and connected network generated in financial system crop up systemic risk. Hence, the failure of one bank can cause the failure of many other banks as well.
4.8 Moral hazard
Moral hazard can happen under information imbalance. Here the risk-taking party of the transaction knows more about its intentions than the party paying the consequences of the risk and entity has an incentive to increase its exposure to risk from the perspective of the party with less information.
Hope this article explains in detail the risks which are involved in Banking and Finance.
