What went wrong in measuring and managing risk associated with financial institutions - Research Paper Example

est rate risks, credit risks, foreign exchange risks, and liquidity risks that affected the functions of investment bankers, securities – stocks, bonds, derivatives -- mutual funds and insurance rate. A research into the measuring and managing techniques has been made to understand what went wrong and where. Taking the example of HSBC Holdings plc – a global financial institution providing all financial services under its umbrella, it has been attempted to explain how things went wrong. Financial institutions cater to the needs of different types of customers by providing relevant financial services.

Financial institutions worldwide have been affected by the adverse market environment created by the US sub prime fiasco. Trouble began when the financial companies started relying too much on the innovation in the blind faith that it will yield returns. In the current context of sub prime melt down, initially the balloon of leveraging the assets’ market went on getting bigger and bigger, creating unrealistic and illusionary hype in market, which in the end shrank the balloon to cause global crisis of liquidity in financial institutions.

Selling of financial products and services is a risky business, fraught with internal and external risks associated. Measuring and managing financial risks is crucial to the success of a financial company. There are different types of financial institutions operating at national as well as global scale. Before delving deep into the list of errors committed by financial institutions, it is significant to define the scope of financial institutions like banks, insurance, mutual funds, securities firms, investment banks, and finance companies.

A financial institution collects funds from private as well as public investors to use them in financial assets. Financial institutions play the role of mediators in share markets and debt security markets. Financial activities may include bonds, debentures, stocks, loans, risk