Sources of Risk

Let us discuss the Sources of Risk. 

Mismatch

Risks arise from the common cause of mismatching.

• Liquidity risk: When maturities of assets exceed those of liabilities.
• Interest rate risk: When interest rate terms differ.
• Currency risk: When currency denomination of assets and liabilities differ there is inevitably currency risk.
• Counterparty risk: When transactions are undertaken for settlement at a later date counterparty risk of the other party to a transaction will not complete as agreed exists.

Internationalization of Banking System

The internationalization of finance facilitated by telecommunications and computer technology while increasing the range of activities of banks are likely to complicate the monitoring and controlling of the business. The increased interdependence of banks carries ‘systemic risk’ that is, if one bank defaults on its commitment, others may be forced to default.

Other Risks

Other risks that may cause a reduction in the bank’s value due to changes in the business environment are:

• Market risk: It is the change in net asset value due to changes in underlying economic factors such as interest rates, exchange rates, and equity and commodity prices.
• Credit risk: It is the change in net asset value due to changes the perceived ability of counterparties to meet their contractual obligations.
• Operational risk: This risk results from cost incurred through mistakes made in carrying out transactions such as settlement failures, failures to meet regulatory requirements, and untimely collections.
• Performance risk: This encompasses losses resulting from the failure to properly monitor employees or to use appropriate methods.

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