🏛️ Types of Risk
Understand different types of risks
Common Risk Terms for Bankers
- Credit Risk: Arising on account of possible default by borrower to repay the loan.
- Market Risk: Arising on account of changes in the value of investment in govt. securities, gold or forex, held by the bank, due to change in market variables.
- Interest Rate Risk: Arising due to change in interest rates. It is part of market risk.
- Liquidity Risk: Arising due to mismatch in residual maturity period of assets and liabilities. This is of short term nature. It is part of market risk.
- Settlement Risk: Inability of a bank to settle due the payments due to other banks.
- Systemic Risk: Impact of failure of one bank on other banks / banking system.
- Operational Risk: Arising due to (1) errors by staff or (2) inadequate or failed systems or (3) external reasons. (for example opening of account without complying with KYC).
- Legal Risk: Defective documentation (it is an operational risk).
Risks That Students Often Confuse
Settlement risk, systemic risk, and operational risk can sound similar in revision. The key difference is whether the problem is a failed payment, contagion across banks, or an internal people/process/system failure.
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Common Risk Terms for Bankers
- Credit Risk: Arising on account of possible default by borrower to repay the loan.
- Market Risk: Arising on account of changes in the value of investment in govt. securities, gold or forex, held by the bank, due to change in market variables.
- Interest Rate Risk: Arising due to change in interest rates. It is part of market risk.
- Liquidity Risk: Arising due to mismatch in residual maturity period of assets and liabilities. This is of short term nature. It is part of market risk.
- Settlement Risk: Inability of a bank to settle due the payments due to other banks.
- Systemic Risk: Impact of failure of one bank on other banks / banking system.
- Operational Risk: Arising due to (1) errors by staff or (2) inadequate or failed systems or (3) external reasons. (for example opening of account without complying with KYC).
- Legal Risk: Defective documentation (it is an operational risk).
Risks That Students Often Confuse
Settlement risk, systemic risk, and operational risk can sound similar in revision. The key difference is whether the problem is a failed payment, contagion across banks, or an internal people/process/system failure.
Summary Cheat Sheet
| Concept / Topic | Key Details / Explanation |
|---|---|
| Credit Risk | Risk of borrower defaulting on loan repayment |
| Market Risk | Loss due to changes in value of govt. securities, gold, or forex caused by market variable movements |
| Interest Rate Risk | Loss from change in interest rates; a sub-type of Market Risk |
| Liquidity Risk | Arises from mismatch in residual maturity of assets and liabilities; short-term in nature; sub-type of Market Risk |
| Settlement Risk | Inability of a bank to settle due payments to other banks |
| Systemic Risk | Failure of one bank impacting other banks / the entire banking system (domino effect) |
| Operational Risk | Caused by (1) staff errors, (2) inadequate/failed systems, or (3) external events (e.g., account opened without KYC compliance) |
| Legal Risk | Arises from defective documentation; classified as a type of Operational Risk |
| Risk hierarchy (Market) | Market Risk contains Interest Rate Risk and Liquidity Risk as sub-categories |
| Risk hierarchy (Operational) | Operational Risk contains Legal Risk as a sub-category |
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