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Risks Facing Financial Insitutions - Essay Example

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The understanding of Risks faced by Financial Institutions is essential for the effective management of any economy. These risks that face the modern financial institutions and form the absolute nightmares of financial regulators can be fatal to the health and wealth of any institution…
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Risks Facing Financial Insitutions
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Download file to see previous pages alth and wealth of such financial institutions. (Aharony, 1986) Its 1988 Basel Accord deals with credit risk and has extensively guided international banks in their risk management.Similarly the Basel II(International Convergence of Capital Measurement and Capital Standards) deals with the problem of operational ,legal and strategic as well as those arising out of the loss of goodwill. ( Hsaio 2008) , This paper therefore discusses the risks faced by modern financial institutions,international efforts to resolve such risks as well as the techniques used by banks to calculate interest risks.
The past two decades have indeed seen an increased banking response to the systemic risks in the financial system which emerged in response to the 1930's banking crises of the 1930s.Banks and other financial institutions perform the functions of financial intermediaries that distinguish them from other businesses. They intermediate liquidity between economic subjects and in this process face a number of risk atypical of non-financial firms. (Aharony, 1986)This financial risk measurement and management becomes very important for banks than for other companies.
The modern financial institutions are very complex as they increasingly offer fee-based financial services and relatively new financial instruments and this has led to the creation of a number of new risks.Essentially the riskier the bank's business, the more capital it should hold to be able to cover future fiscal losses. Although various banks face different risks (with regards to their category) some risks are common to most banks like Credit risk , Liquidity risk , Solvency risk , Operational risk , Market risk and Interest rate risk. (Aharony, 1986)
In the above paragraph a number of risks have been identified and while many of them have been overcome by regulation many still sting the face of financial prudence as unresolved dilemmas. (Aharony, 1986) These are risks like operational risks (which have been defined by the Basel Committee(Basel II) as arising from 'inadequate or failed processes, people and systems or from external events'. ( Hsaio 2008) ,
Operational Risks cover a wide category of risks which pertain to human error or technical deficiencies.(Black,1972) and are related to all other types of risk such as capital needs, inflation, concentration of revenues (by customers, products, geographies, etc.) new competitive conditions and environmental remediation obligations(reinforced by the new concept of Corporate Social Responsibility).(Black,1972). Operational risk is the newest area of focus in the the arena of the financial institutions but there are theoretical and practical difficulties involved in it's assessment as well as statistical irregularities in the data available. ( Hsaio 2008) ,
However more serious risks pertain to losses which arise due to the failure of the obligator to perform(Credit Risk) and such losses are reported to be responsible for more ...Download file to see next pagesRead More
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