Key Bank Risks

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Key Bank Risks
There are several bank risks and literature concludes that the risks associated with the provision of banking services differ by the type of service rendered. Different authors like () have grouped these risks in various ways to develop the frameworks for their analyses but the common ones which are considered in this study are credit risk, market risks (which includes liquidity risk, interest rate risk and foreign exchange risk), operational risks which sometimes include legal risk, and more recently, strategic risk.
2.4.1 Credit Risk
Greuning and Bratanovic (2009) define credit risk as ‘the chance that a debtor or issuer of a financial instrument— whether an individual, a company, or a country— will not repay principal and …show more content…

As a matter of fact, a bank uses a credit or lending policy to outline the scope and allocation of a bank‘s credit facilities and the manner in which a credit portfolio is managed—that is, how investment and financing assets are originated, appraised, supervised and collected (). There are also minimal standards set by regulators for managing credit risk. These standards cover the identification of existing and potential risks, the definition of policies that express the bank‘s risk management philosophy, and the setting of parameters within which credit risk will be controlled. There are three kinds of policies related to credit risk management. The first set aims to limit or reduce credit risk, which include policies on concentration and large exposures, diversification, lending to connected parties, and overexposure. The second set aims at classifying assets by mandating periodic evaluation of the collectability of the portfolio of credit instruments. Lastly, the third set of policies aims to make provision for loss or make allowances at a level adequate to absorb anticipated loss …show more content…

Santomero (1995) however, posits that there is the need to assess liquidity risk potential for funding crisis. An effective liquidity risk management will help ensure a bank's ability to meet cash flow obligations, which are uncertain as they are affected by external events and other agents' behaviour. Furthermore, the Basel Committee (2008) asserts that the fundamental role of banks in the maturity transformation of short-term deposits into long-term loans makes banks inherently vulnerable to liquidity risk, both of an institution-specific nature and that which affects markets as a whole. A liquidity deficit in a single bank can have system-wide consequences and hence, liquidity risk management is of importance to both the regulators and the industry players. Notably, the price of liquidity is a function of market conditions and the market‘s perception of the inherent riskiness of the borrowing institution (Greuning and Bratanovic, 2009). Other studies conclude that financial market developments in the past decade have increased the complexity of liquidity risk and its

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