Risks in Banks

Risks in Banking
|Banking, by its nature, entails taking a wide array of risks. Banking supervisors need to understand these risks and be satisfied that banks|
|are adequately measuring and managing them. The key risks faced by banks are discussed below. |
|Credit risk |
|The extension of loans is the primary activity of most banks. Lending activities require banks to make judgements related to the |
|creditworthiness of borrowers. These judgements do not always prove to be accurate and the creditworthiness of a borrower may decline over |
|time due to various factors. Consequently, a major risk that banks face is credit risk or the failure of a counterparty to perform according|
|to a contractual arrangement. This risk applies not only to loans but to other on- and off-balance sheet exposures such as guarantees, |
|acceptances and securities investments. Serious banking problems have arisen from the failure of banks to recognise impaired assets, to |
|create reserves for writing off these assets, and to suspend recognition of interest income when appropriate. |
|Large exposures to a single borrower, or to a group of related borrowers are a common cause of banking problems in that they represent a |
|credit risk concentration. Large concentrations can also arise with respect to particular industries, economic sectors, or geographical |
|regions or by having sets of loans with other characteristics that make them vulnerable to the same economic factors (e.g., highly-leveraged|
|transactions). |
|Connected lending - the extension of credit to individuals or firms connected to the bank through ownership