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Institution
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In any event of a recession, financial institutions find themselves to be in one of the most affected industries. This together with the fact that they are always facing several risks at all times exposes their operations to many possible and dangerous outcomes. These risks include Credit risks, liquidity risks, interest rate risk, asset management risks, operational risks and liability risks among others which if not properly managed and countered may leave these institutions in a situation where the collapsing of their businesses would be the ultimate end. This paper covers the risks that the financial institutions have been exposed to during the past incidences of recessions and how these financial institutions faced them.
Credit risk This is a risk of loss of principal resulting from the failure of a borrower to repay a loan in accordance with the agreed terms. Credit risks are usually faced by a lot of banks during recessions since the financial strength of most borrowers is always in jeopardy. Credit risks mostly affects loans and bonds and can be categorized into three forms. These categories include; Downgrade risks, credit spread risk and the default risk. * Downgrade risk deal with rating agencies such as S & P. These agencies give an issuer a rating that gives the possibility of default. The ratings range from the best, that is, AAA, to AA, A, BBB and CCC. If a company’s rating is downgraded by one of these rating agencies, it then becomes harder for a payment to be done by the corporation. * Credit spread risks on the other hand deals with the reaction of spread of an issue over the treasury curve. * Default risk is the risk that the issuer will go out of business and not be able to pay its obligations of interest and principal. Investors use default rates to help in measuring this risk. An investor could also look at the recovery rate. A default rate is the percentage of a
Name
Date
In any event of a recession, financial institutions find themselves to be in one of the most affected industries. This together with the fact that they are always facing several risks at all times exposes their operations to many possible and dangerous outcomes. These risks include Credit risks, liquidity risks, interest rate risk, asset management risks, operational risks and liability risks among others which if not properly managed and countered may leave these institutions in a situation where the collapsing of their businesses would be the ultimate end. This paper covers the risks that the financial institutions have been exposed to during the past incidences of recessions and how these financial institutions faced them.
Credit risk This is a risk of loss of principal resulting from the failure of a borrower to repay a loan in accordance with the agreed terms. Credit risks are usually faced by a lot of banks during recessions since the financial strength of most borrowers is always in jeopardy. Credit risks mostly affects loans and bonds and can be categorized into three forms. These categories include; Downgrade risks, credit spread risk and the default risk. * Downgrade risk deal with rating agencies such as S & P. These agencies give an issuer a rating that gives the possibility of default. The ratings range from the best, that is, AAA, to AA, A, BBB and CCC. If a company’s rating is downgraded by one of these rating agencies, it then becomes harder for a payment to be done by the corporation. * Credit spread risks on the other hand deals with the reaction of spread of an issue over the treasury curve. * Default risk is the risk that the issuer will go out of business and not be able to pay its obligations of interest and principal. Investors use default rates to help in measuring this risk. An investor could also look at the recovery rate. A default rate is the percentage of a