Type of risks:
- Operational Risk
- Transaction Risk
- Compliance Risk
- Liquidity Risk
- Funding Risk
- Time Risk
- Call Risk
- Interest Rate Risk
- Market Risk
- Forex Risk
- Market Liquidity Risk
- Credit or Default Risk
- Counterparty Risk
- Country Risk
- Strategic Risk
- Reputation Risk
Operational Risk:
Operational risk has been defined by the Basel Committee on Banking Supervision as the risk of loss resulting from inadequate or failed internalprocesses, people and systems or from external events. This definitionincludes legal risk, but excludes strategic and reputational risk. Thisdefinition is based on the underlying causes of operational risk. It seeks to identifywhy a loss happened and at the broadest level includes the breakdown by fourcauses: people, processes, systems and external factors.
Two of the most common operational risks are –
Transaction Risk: (Errors & Omissions, and Frauds)
It is the risk arising from fraud, both internal and external, failed business processes and the inability to maintain business continuity and manage information.
| People | Processes | Systems |
| Error | Accounting error | Data quality |
| Fraud | Reporting error | Programming error |
| Lack of knowledge | Settlement / payment error | Security breach |
| Oversight | Valuation error | System failure |
| Loss of Key personnel | Transaction error | System capacity |
Compliance Risk: It is the risk of legal or regulatory sanction, financial loss or reputation loss that a bank may suffer as a result of its failure to comply with any or all of the applicable laws, regulations, codes of conduct and standards of good practice. It is also called integrity risk since a bank’s reputation is closely linked to its adherence to principles of integrity and fair dealing.
Liquidity risk
The liquidity Risk of banks arises from funding of long-term assets by short-term liabilities, thereby making the liabilities subject to rollover or refinancing risk.
The liquidity risk in banks manifest in different dimensions –
Funding Risk: Funding Liquidity Risk is defined as the inability to obtain funds to meet cash flow obligations. For banks, funding liquidity risk is crucial. This arises from the need to replace net outflows due to unanticipated withdrawal/ non-renewal of deposits (wholesale and retail).
Time Risk: Time risk arises from the need to compensate for non-receipt of expected inflows of funds i.e., performing assets turning into non-performing assets.
Call Risk: Call risk arises due to crystallisation of contingent liabilities. It may also arise when a bank may not be able to undertake profitable business opportunities when it arises.
Interest Rate Risk
Interest rate risk is the risk that arises for bond owners (Fixed coupon bearing Instrument owner) from fluctuating interest rates. How much interest rate risk a bond has depends on how sensitive its price is to interest rate changes in the market.
The sensitivity depends on two things, the bond’s time to maturity, and the coupon rate of the bond.
Interest rate risk is unquestionably the largest part of the Sensitivity analysis in the CAMELS system for most banking institutions.
CAMELS stand for:
Capital adequacy
Assets
Management Capability
Earnings
Liquidity
Sensitivity to market risk