Key Types of Risks Facing Banks

Banking CIO Outlook | Wednesday, January 12, 2022

Risk is unavoidable, so banks must do everything possible to mitigate it. Many banks struggle to meet the challenge of risk management. Meeting this challenge necessitates a thorough understanding of the various types of bank risk to be on the lookout for, as well as the technologies that will assist you in overcoming them.

Fremont, CA: The financial services regulatory landscape is constantly changing, with new regulations or amendments to existing regulations issued every month in response to political upheaval, public sentiment, emerging technology, and other factors.

Banks face significant risks; the following are the seven most common types:

Operational Risk

Any risk incurred due to failure in people, internal processes and policies, or systems. Service interruptions and security breaches are typical examples of operational risk in banks.

Market Risk

 Also known as systematic risk, it refers to any losses incurred due to changes in the global financial market. For example, economic recessions, natural disasters, political unrest, and changes in interest rates are all sources of market loss.

Liquidity risk

It refers to a bank's inability to meet its obligations, putting its financial standing or even its very existence in jeopardy. Liquidity risks effectively prevent banks from converting assets into cash without incurring capital losses.

Compliance Risk

Any risk incurred due to failure to comply with federal laws or industry regulations is referred to as a compliance risk. Financial penalties, reputational damage, and legal penalties can result from noncompliance.

Reputational Risk

The name implies, refers to any potential harm to a bank's brand or reputation. Banks' reputations can be jeopardized for various reasons, ranging from the actions of a single employee to the actions of the entire institution.

Retail banks take a credit risk when they lend money to a borrower without guaranteeing that the borrower will repay the loan. The risk is that the bank will incur debt due to the agreement.

Business risk

Any risk that arises from a bank's long-term business strategy impacts the bank's profitability. For example, closures and acquisitions, loss of market share, and inability to keep up with competitors are all familiar sources of business risk for banks.

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