bankingciooutlook

Six Challenges Banks Face With Risk Management

Banking CIO Outlook | Tuesday, May 17, 2022

A bank's inability to meet its obligations may jeopardize its financial standing, if not even its existence. Liquidity risks prevent a bank from converting its assets into cash without sacrificing capital due to low-interest rates.

Fremont, CA: It is impossible to avoid risk, which is why banks must take every measure to mitigate it. Managing risk is a challenge that many banks struggle with. In order to meet this challenge, you must know which types of bank risk to look for and what technologies will help you overcome them.

Key Risks Associated with Banks

Here are the seven types of risk that banks face:

Operational Risk: These are risks associated with people, internal processes, policies, and systems failing. Security breaches and service interruptions are examples of operational risks in banks.

Market Risk: Also known as systematic risk, this refers to losses resulting from changes in global financial markets. Market losses can result from economic recessions, natural disasters, political unrest, and changes in interest rates.

Liquidity Risk: A bank's inability to meet its obligations may jeopardize its financial standing, if not even its existence. Liquidity risks prevent a bank from converting its assets into cash without sacrificing capital due to low-interest rates.

Compliance Risk: Any risk arising from failure to comply with federal laws or industry regulations. Compliance risk can result in financial loss, reputational damage, and legal penalties.

Reputational Risk: This term describes any potential damage a bank might suffer to its reputation or brand. Reputational risks can arise for a range of reasons, from the actions of one employee to the actions of the entire institution.

Credit Risk: When banks lend money to borrowers without a guarantee that the borrower will be able to repay the loan, they take on credit risk. As a result of such an agreement, the bank might incur debt.

Business Risk: Any risk stemming from a bank's long-term business strategy and affecting the bank's profitability. Closures and acquisitions are common sources of business risk for banks, as well as losing market share and being unable to keep up with the competition.

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