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Week 5 T test ANOVA: Assignment: t-Tests and ANOVA You are a DNP-Prepared nurse tasked with evaluating patient care

Week 5 T test ANOVA:
Assignment: t-Tests and ANOVA
You are a DNP-Prepared nurse tasked with evaluating patient care at your practice compared to patient care at affiliated practices. You have noticed that a key complaint from your patients concerns the wait times associated with each patient visit. Based on these complaints, you have decided to compare the wait times at your practice to the wait times at affiliated practices. After recording the wait times at each practice, for 50 individual patients at each practice, you are now prepared to analyze your data. What approach will you use to analyze the data?

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In the scenario provided, you might decide to use, the Analysis of Variance (ANOVA) approach. “ANOVA is a statistical procedure that compares data between two or more groups or conditions to investigate the presence of differences between those groups on some continuous dependent variable” (Gray

Risks in Financial Sector 19 Module Title Student ID Number: Coursework Assignment

Risks in Financial Sector 19

Module Title

Student ID Number:

Coursework Assignment 2

Word Count: 3978 words

Introduction 3

The Forms of Risk Banks Face 3

The View of Regulators focusing on one risk 7

The Basic Risk for Banks is Credit Risk 7

Other Forms of Risk are Critical to Banks 8

Case Study Examples 9

Bank run of Northern Rock (Northern Rock Case) 9

The Barings case 10

Misconduct of Salomon Brothers 10

Analysis and Conclusions from the Three cases 11

Suggestions on Regulator’s Comprehensive Risk Management 12

Framework Guidance 12

Risk Identification 12

Risk Assessment 13

Control Activities 14

Disclosure 15

Monitoring 15

Conclusion 16

References 18

Introduction

Banks are a key element of the financial sector and the entire nation’s economy. Lending is one of the most important duties of a bank. Banks may experience losses as a result of probable defaults by borrowers when they lend money to persons or organisations. This is referred to as credit risk, and it has been viewed as a key risk to the banking business. The other types of risk have either been overlooked or have received only a little attention.

As a result of external and internal reasons such as the evolution of regulatory regimes, the adoption of new technology, business strategy transformation, and others, the financial services sector has experienced tremendous transition during the last several decades. In this type of situation, there are undoubtedly several dangers in addition to the credit risk. These risks have a high probability of causing bank failures or perhaps a domino effect that could result in systemic risk if they occur.

This paper outlines and describes the numerous types of threats that banks are exposed to and critically evaluates and discusses the existing regulatory system’s emphasis on only credit risk. This study also includes several recommendations for methods to strengthen the current system and an argument for considering other hazards.

The Forms of Risk Banks Face

It is possible to categorise risks in various ways, such as according to their risk factors, the extent to which they have an influence or the repercussions of the risks. As stated in this paper, risk research should be conducted to reduce the likelihood and effect of hazards by investigating their sources and consequences (Zavadskas, 2020). The classification of risks according to their causes is emphasised more significantly in this study.

Credit Risk

Credit risks are risks that counterparties, whether members or another organisation, may not completely satisfy their financial commitments when they are required to pay or down the road. Usually, credit risk is significant, and the most frequent risk banks face (Konovalova, 2016). This is due to the increased likelihood that the bank’s financial instruments or loans will not be returned in full or in part when due. Default is frequently accompanied by credit risk.

Market Risk

Market risk is the possibility of losses in a banking book due to changes in asset values, credit spreads, interest rates, commodity prices, foreign exchange rates, and other factors whose values are determined by the public market as other factors. In the financial world, market risk is a type of speculative risk that only imposes losses whenever the price movements in a particular market are not beneficial to the bank (Sweeting, 2017). As a result of the numerous types of markets and the rapid and wide fluctuation in price movement, market risk has become considerably more sophisticated and difficult to forecast, evaluate, and remove. At the start of a trading session, even tiny losses can balloon into massive losses due to unanticipated price fluctuations in a given market.

Operational Risks

Operational risk deficits in internal processes or informational systems, management failures, human errors, or interruptions from external occurrences will decrease the breakdown or deterioration of services offered by a financial institution (Karam, 2012). Over the previous two decades, many banks have been affected by failing operations, which have hurt some institutions’ future profitability and prospects. When in comparison to other risks like operational risk and market risk, which have been discussed previously, operational risk is far more difficult to understand and even more difficult to monitor, measure, trace, and measure, because of the large number of unknown external and internal factors that can occur.

Liquidity Risk

Liquidity risk can be divided into two categories (Álvarez-García et al., 2019):

The risk that a company may be unable to receive the funds it requires to continue the smooth functioning of its commercial activities is referred to as funding liquidity risk.

Market liquidity risk occurs when it is challenging to manage the holding in the markets without causing a large and adverse impact on the underlying security’s price.

The ability of a bank to satisfy its obligations on time is referred to as liquidity risk. When a bank doesn’t have enough cash on hand to meet the withdrawal demands of many depositors, a bank run occurs, resulting in panic in the local banking industry and even economic downfall.

Business or Strategic Risk

Business or Strategic risk arises in the quest for long and short-term corporate objectives. Improper strategic choices or future production planning may result in fewer earnings than planned and, in certain cases, losses rather than profits. This risk exists throughout the life span of a bank and will impact the bank’s competitive position due to the rapidly changing environment (Rampini, 2015). Banks must constantly reevaluate and revise their long and short-term objectives and strategies in market share loss or liquidation.

Legal or Compliance Risk

Legal risks have to do with the inability of the bank to comply with laid down rules, laws, and regulations in the market where it is operating (Funso & Lawal, 2020). Such actions or inactions result in reputational damage and financial loss. Banks conduct business operations inside a regulated environment. As a result of noncompliance, many banks are now required to pay a vast number of fines, penalties, and legal fees imposed by local governments, the taxation office, bank regulators, law firms, and courts, among other entities, as well as legal fees.

Reputation Risk

The risk of a bank’s reputation capital being depleted due to unforeseen occurrences, market performances, company policy revisions, or unfavourable results from normal business operations is referred to as Reputation Risk. A bank will incur higher losses if its customers’ reputations and faith are damaged (Ellul, 2015). Even if the bank’s systems, day-to-day operations, and capital position are still good. Meanwhile, repairing a tarnished image/reputation will be expensive and time-consuming.

Country Risk

Country risk refers to the unpredictable hazards that can arise due to the cultural, political, security, economic, or other factors affecting the country wherein the banks conduct their business operations. Supposedly, the country is economically and politically unstable. The banks that do business there will suffer greatly due to this.

Systemic Risk

The disturbance of the source of financial services produced by a deterioration of all financial sector components is referred to as Systemic Risk (Clark, 2016). It can have major negative effects on the actual economy. It is defined as: Meaning Systemic Risk refers to the breakdown of the entire financial system, resulting in a general collapse, instead of a single institution failing in a vacuum. Systemic risk emerges in the financial system due to intrinsic structural flaws such as procyclicality, information asymmetries, interdependence, and perverse incentives (Funso & Lawal, 2020). Due to these structural problems, the systemic risk might be effective globally or only in a particular country. Countries whose economies are heavily reliant on banks or their financial institutions are primarily operated or controlled by foreign investment are particularly exposed to systemic risk.

Moral Hazard

A moral hazard is any circumstance in which an individual makes a risky decision, while another person takes the price when things go wrong (Stulz, 2008). Moral hazard has been identified as an underlying cause of several financial disasters. Whenever a bank makes a strategic decision, the decision-makers think that if the choice goes wrong and the bank suffers significant losses, they won’t face the consequences straight, but rather, the government or other third parties will. Under moral hazard, bank investors or depositors would be exposed to a high level of risk with no expectation of reward.

The View of Regulators focusing on one risk

The Basic Risk for Banks is Credit Risk

From a historical perspective, lending money to consumers is a fundamental function of financial institutions. The majority of other financial derivates and instruments such as bonds, loans, trade finance, interbank transactions, guarantees, swaps, forward contracts, futures contracts, and even substandard lending, are all in some way or another tied to lending in their fundamental nature (Van Der Hoog, 2017). Priority one for banks should be ensuring that the borrowing loans will be able to gather the main and interest payments without default. Financial firms can survive and grow based on this principle. Otherwise, cascading failures could be triggered, resulting in the emergence of systemic risk. The subprime mortgage crisis in the United States, which triggered the global financial crisis in 2008, is the clearest illustration of credit risk.

A subprime mortgage crisis, in reality, is at the heart of the global financial crisis of 2008. As the name implies, subprime mortgages are loans made to those with bad credit scores and lower incomes than the average person (Catherine, 2020). Those who have been denied the ability to give high-quality mortgages will turn to subprime mortgages to purchase a house. When borrowers fail to satisfy their commitments due to the credit easing strategy and rising house prices, banks may still be able to make money by restructuring or just selling the mortgaged property.

As housing bubbles popped and interest rates rose, many lenders found themselves unable to pay back their loans on time (Muhammad et al., 2018). Even if the banks successfully reclaim the property as collateral, they would still suffer significant losses since they would be unable to market the property as collateral for the amount they had anticipated. As a result, the crisis that hit resulted in the collapse of the entire financial system. In the same way as the financial crisis of 2008 crisis was caused by credit risk, there have been several earlier financial crises or examples of bank liquidation throughout history. For banks to avoid credit risk from arising, they must take the following steps:

Other Forms of Risk are Critical to Banks

In recent times, the financial industry accounts for a significant portion of gross domestic product (GDP), particularly in rich and rising developing countries. External and Internal factors, such as business strategy transformation, adoption of modern technologies, and changes in the regulatory environment, have all contributed to the major transformation of financial institutions (Okafor, 2019). Today’s business banks have evolved into a complex ecosystem that offers their customers a wide range of financial solutions. It is far from sufficient just to manage credit risk to meet the standards of modern banks. Other areas of damage are also quite important to financial institutions. Other types of risk will be used as examples in this study to demonstrate how important they are.

Case Study Examples

Bank run of Northern Rock (Northern Rock Case)

A bank based in the United Kingdom that specialises in financing real estate, Northern Rock, declared in 2007 that it needed immediate money from a Bank of England to keep operations running. Northern Rock was indeed a small bank with a limited depositor base, making it unable to fund fresh loans on its own (Rampini, 2020). It started top sell mortgages to banks and was vulnerable to the capital market spontaneity. The amount of finance Northern Rock was able to raise was determined by the performance of the overall banking industry.

In times of financial stress, the bank struggled to market the mortgages that originated in the first place. On the other hand, the company could not manage the necessary short-term loans and could not raise more cash, ultimately running out of money. The government eventually seized control of the property. Liquidity risk was the root cause of the Northern Rock debacle. When Northern Rock is experiencing a cash shortage, despite a substantial proportion of non-assets, depositors rush to withdraw their funds, causing the cash deficit to worsen. This is a prime cause of a bank robbery gone wrong.

The Barings case

For trading derivatives on behalf of its clients, Baring Brothers and Co. Ltd (Barings) established a branch in London. The Nikkei Index Futures contract, traded by another one of Baring’s dealers in Singapore, resulted in a GBP20,000 loss in 1992 (Thi Thieu Quang & Gan, 2019). Even though it’s not a significant loss, the head contracts trader, Nick Lesson, chose to conceal the truth to regain the loss in subsequent trades. Nick was capable of approving his trades and booking them into the bank’s network without any supervision because of insufficient internal control systems and procedures. As a result, he continued to buy, although the price patterns of the Nikkei Average were continually in conflict with his predictions. An earthquake struck the Japanese city of Kobe in 1995, and the price of the Nikkei Index futures plummeted by a factor of several hundred (Thi Thieu Quang & Gan, 2019). Nick had incurred a loss of more than GBP 800 million, which had amassed over time. Keeping the loss a secret was no longer possible. Barings fell and went bankrupt in the same year as Barings.

The operational risk was the root cause of Barlings’s situation. So very much damage for Barings was caused by human mistakes and an inadequate internal control mechanism. A growing number of banks have suffered from failing operations over the previous two decades, with serious consequences for the prospects and profitability of some institutions. It is also possible that market risk was a factor in Barlings’ situation (Murray, 2019). The Nikkei Index futures contract will not be penalised if there is no significant price movement.

Misconduct of Salomon Brothers

Salomon Brothers were detected in 1991, placing purchase orders for the United States government significantly bigger than the amount allowed (Muhammad et al., 2018). To raise finances, the United States government issues debt instruments at auction and invites a select group of institutions to buy these securities, known as Treasury bills. This auction is limited in size since each bank asked to bid can only buy a certain number of Treasury securities to ensure that the securities are accurately priced. Salomon Brothers accumulated a substantial position in Treasury securities through fictitious identities and documents, ultimately exerting control over the price investors were willing to pay for these securities. When the company’s unlawful operations were made public, the cost of Salomon Brothers’ stock plunged precipitously.

Salomon Brothers suffered a significant tarnish on their reputation. Salomon Brothers were subsequently penalised USD 290 million by the United States government, which was the highest fine ever issued against an investment firm at the time (Muhammad et al., 2018). A reputational risk brought about the Salomon Brothers lawsuit. Salomon Brothers’ reputation was harmed due to unethical conduct in a securities transaction, which resulted in a steep reduction in the price of the company’s stock. The Salomon Brothers case was likewise a result of compliance risk, which resulted in the government imposing massive fines on the company.

Analysis and Conclusions from the Three cases

Based on the three situations presented above, we can undoubtedly draw some conclusions.

Firstly all kinds of risks can have a big impact on the sustainability of banks. Three kinds of risks apply Market risk, credit risk, and operational risks (Thi Thieu Quang & Gan, 2019). There is evidence of Market risk in the Barings scenario. The Northern Rock scenario shows a liquidity risk, and the Salomon Brothers case shows a reputational risk.

Second, some crises or large-scale losses will be activated by various risks occurring simultaneously and across the entire system. Some types of dangers are associated with one another and are intertwined. When market and operational risk were activated simultaneously, it resulted in massive losses for Barings. Furthermore, in the instance of Salomon Brothers, both compliance and reputational risk occurred simultaneously.

Third, the environment in which banking institutions operate has become more turbulent while also becoming more intelligible. It is illogical to concentrate on one type of danger while ignoring all other risks.

Finally, concentrating solely on credit risk is insufficient to meet the risk assessment requirements of financial institutions. Banks are actively involved in a wide range of risks. As a result, all types of risk should be detected, quantified, communicated and monitored continually, regardless of the source.

Suggestions on Regulator’s Comprehensive Risk Management

Framework Guidance

The framework must be guided by key organisations that provide direction, guidance and structure on fraud deterrence, internal management, and ERM. COSO is a typical organisation that offers that in a model of the risk management framework. There are many different types of top-down hierarchical structures that have been widely used everywhere in the world. Regarding the bank risk management process, regulators must make full use of the model provided by the Federal Reserve. At the very least, the structural elements for banks should have five components in total.

Risk Identification

Although this report has identified and explained some common risks that banks must deal with, as regulators, they must nevertheless classify them per their importance and features as a first step. Liquidity risk, Credit risk, Operational risk, and market risk are by far the most critical concerns to which regulators should pay greater attention, and they should be prioritised. Business risk, Country risk, Compliance risk, and reputation risk are the types of risks that should be managed primarily by banking institutions since they are highly tied to the bank’s normal operations and are reasonably simple to comprehend and manage.

Exceptions being the non-systemic risks generated by individual banks, financial regulators’ primary role is to avoid and address systemic risk by closely monitoring and restricting banking activity (Tran & Nguyen, 2020). To address the issues posed by international banking institutions and cross-border financial activities, national financial regulatory agencies should be established, as should international organisations coordinate efforts to address these challenges.

Risk Assessment

Presently, banking regulation is transitioning to a risk-based supervision model. An assessment conducted by authorities is the first and most important stage in risk management. Its task is to determine the categories of risks that banks are exposed to, the degree of risk, the direction in which the risks are evolving, and the capacity to maintain those risks.

The structure should have a collection of Key Risk Indicators that may be used to assess the possibility and potential consequences of various hazards (Macey, 2017). Convergent global indicators or measures are highly recommended, and establishing such indicators or measurements is highly appreciated. The Key Risk Indicators (KRIs) are a set of quantitative or qualitative benchmarks that financial regulators use to plan and assess the risk posed by banks. It also is a collection of fundamental methods for assessing risk.

Basic indicators for key risk indicators (KRIs) should measure the reserve requirements based on the premise that a financial institution can interact its total risk level with regulators by providing them with a single figure. The capital adequacy ratio (CAR) should be the most accurate indicator of the least capital need (Tran & Nguyen, 2020). The capital adequacy ratio measures how well a company’s finances are doing. It is necessary to develop more indicators in addition to CAR. Banks face four key risks (operational, market, credit, and liquidity) must have an indicator group, which should be distinct from the others. It is important to consider other elements when developing KRIs, such as the surroundings, risk culture, and risk appetite, among other things.

Control Activities

The purpose of management control is to conduct supervision and inspections based on the results of the risk analysis, which comprises the following elements (Wiid et al., 2015):

Capital Requirements: As previously indicated, it is usually done out under the supervision of the Capital Adequacy Ratio (CAR). When it comes to capital requirements, the authorities must decide if a minimum CAR must be preserved or if it can be decreased in times of crisis.

Bank Risk Score: This assesses the bank’s management framework, which includes the integrity, efficiency of policies and procedures, effectiveness, and techniques for identifying, measuring, monitoring, and controlling risks. It differs from the particular bank’s self-rating and credit ratings from other professional agencies. It can avoid hazards, maintain continuous oversight, and encourage the steady growth of banks. It can be done using KRI calculations and on-site or off-site inspections.

Inspection and checking: To guarantee that risks are properly controlled, authorities should implement risk adjustment and treatment arrangements through off-site monitoring or on-site inspection.

Disclosure

Disclosure requires the openness and transparency of information to enable easy assessment of the bank’s operations (Wiid et al., 2015). This information serves as a guide for investors and the market and gives bank clients a better understanding of the banks’ operations and risk exposures. All included accounting disclosures, risk exposure, general disclosure requirements, and risk assessments. It is contingent on the dissemination of statistical information to the general public.

Monitoring

Regulation monitoring procedures are used by the regulatory authorities to audit and monitor the activities of financial industry players. They’re concerned about minimising systemic risk or the possibility that one bank’s failure will affect other banks or the industry. The only method to enforce macroprudential restrictions is to keep tabs on banks’ day-to-day operations by restricting the amount of money they lend or the types and nature of banking products they offer to the general public. It is also stated that procyclicality is a significant issue in banking and capital. When the economy is doing well, Banks experience a boom, and they can fulfil their lending obligations to the extent that they start boring low-quality borrowers who may default (Baker & Filbeck, 2015). This causes a bubble, especially as has been seen in real estate. Eventually, the bubble bursts and the low-quality lenders are unable to fulfil their payments making it difficult to lend to additional people.

Conclusion

There is no question that banks are exposed to a variety of risks. Market risk: Credit, liquidity, and operational risks are the key risks that banks face. The bank’s other types of risk include reputation risk, strategic risk, nation risk, and compliance risk. Controlling systemic risk and avoiding moral hazards are essential objectives for financial regulators. By examining the sources and consequences of risks, risk research should be carried out to lessen the likelihood and impact. Market risk is more complex and difficult to foresee, analyse, and eliminate.

Operational risk is far more difficult to comprehend and monitor, measure, trace, and measure than other types of risk. In the financial markets, risk occurs when it is impossible to manage a position without an adverse impact on the price of the underlying security. A bank run occurs when a financial institution does not have enough cash on hand to meet the withdrawal demands of a large number of depositors.

The experiences of Barings, Northern Rock, and Salomon Brothers demonstrate that a wide range of risks can significantly influence the long-term viability of financial institutions. Some crises or large-scale losses will be triggered by a combination of risks that occur simultaneously in different locations. The banking industry is actively involved in many hazards, not only credit risk. Regulators must make full use of the model established by the Federal Reserve System.

As a result, excellent practice techniques should be able to control various types of risks while avoiding a narrow perspective. Performing comprehensive risk administration and incorporating as much risk into risk assessment are inevitable international trends, even though many regulators and banks only focus on credit risk. Regulatory financial agencies should actively participate in risk assessment methods, identification, control actions, disclosure, and monitoring within the comprehensive risk assessment structure and risk-based supervision. It will help individual banks’ prosperity and overall safety and soundness of the banking system. The framework must be guided by key organizations in the areas of fraud deterrence, internal management, and enterprise risk management (ERM). The capital adequacy ratio (CAR) should be the most accurate indicator of a company’s ability to fund its operations with the least amount of capital. Each risk type must be represented by a separate indicator group. It is critical to take into account other factors such as the surrounding environment, risk culture, and risk appetite, among other things.

References

Baker, H. K., & Filbeck, G. (Eds.). (2015). Investment Risk Management. Investment Risk Management. https://doi.org/10.1093/acprof:oso/9780199331963.001.0001

Catherine, N. (2020). Credit Risk Management and Financial Performance: A Case of Bank of Africa (U) Limited. Open Journal of Business and Management, 08(01), 30–38. https://doi.org/10.4236/ojbm.2020.81002

Clark, B. (2016). Risk and risk management in the credit card industry. Journal of Banking & Finance, 72, 218–239. https://doi.org/10.1016/j.jbankfin.2016.07.015

Ellul, A. (2015). The Role of Risk Management in Corporate Governance. Annual Review of Financial Economics, 7(1), 279–299. https://doi.org/10.1146/annurev-financial-111414-125820

Karam, E. (2012). Operational Risks in Financial Sectors. Advances in Decision Sciences, 2012, 1–57. https://doi.org/10.1155/2012/385387

Konovalova, N. (2016). Credit Risk Management In Commercial Banks. Polish Journal of Management Studies, 13(2), 90–100. https://doi.org/10.17512/pjms.2016.13.2.09

Macey, J. (2017). Error and Regulatory Risk in Financial Institution Regulation. Supreme Court Economic Review, 25(1), 155–192. https://doi.org/10.1086/694089

Murray, L. (Ed.). (2019). Credit risk and operational risk on the financial performance of universal banks in Ghana: A partial least squared structural equation model (PLS-SEM) approach. Cogent Economics & Finance, 7(1), 1589406. https://doi.org/10.1080/23322039.2019.1589406

Okafor, A. (2019). Research Journal of Finance and Accounting. Bank Risks, Regulatory Interventions and Deconstructing the Focus on Credit Risk. https://doi.org/10.7176/rjfa

Rampini, A. A. (2015). Risk Management in Financial Institutions. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2677051

RAMPINI, A. A. (2020). Retracted: Risk Management in Financial Institutions. The Journal of Finance, 75(2), 591–637. https://doi.org/10.1111/jofi.12868

Stulz, R. M. (2008). Risk Management Failures: What are They and When do They Happen? SSRN Electronic Journal. https://doi.org/10.2139/ssrn.1278073

Sweeting, P. (2017). Financial Enterprise Risk Management. Financial Enterprise Risk Management. https://doi.org/10.1017/9781316882214

Van Der Hoog, S. (2017). The Limits to Credit Growth: Mitigation Policies and Macroprudential Regulations to Foster Macro-Financial Stability and Sustainable Debt. Computational Economics, 52(3), 873–920. https://doi.org/10.1007/s10614-017-9714-4

Zavadskas, E. K. (2020). Risk identification and prioritisation in banking projects of payment service provider companies: an empirical study. Frontiers of Business Research in China, 14(1). https://doi.org/10.1186/s11782-020-00083-5

Module Title Student ID Number: Coursework Assignment 2 Word Count: 3991 words

Week 5 T test ANOVA: Assignment: t-Tests and ANOVA You are a DNP-Prepared nurse tasked with evaluating patient care Nursing Assignment Help Module Title

Student ID Number:

Coursework Assignment 2

Word Count: 3991 words

Introduction 3

The Forms of Risk Banks Face 3

The View of Regulators focusing on one risk 7

The Basic Risk for Banks is Credit Risk 7

Other Forms of Risk are Critical to Banks 8

Case Study Examples 9

Bank run of Northern Rock (Northern Rock Case) 9

The Barings case 10

Misconduct of Salomon Brothers 10

Analysis and Conclusions from the Three cases 11

Suggestions on Regulator’s Comprehensive Risk Management 12

Framework Guidance 12

Risk Identification 12

Risk Assessment 13

Control Activities 14

Disclosure 15

Monitoring 15

Conclusion 16

References 18

Introduction

As the foundation of the financial sector, banks are critical to the growth of the financial sector and, by extension, the growth of the entire economy. Lending is one of the most important duties of a bank. Banks may experience losses as a result of probable defaults by borrowers when they lend money to persons or organisations. This is referred to as credit risk, and it has been viewed as a key risk to the banking business. The other types of risk have either been overlooked or have received only a little attention.

As a result of external and internal reasons such as the evolution of regulatory regimes, the adoption of new technology, business strategy transformation, and others, the financial services sector has experienced tremendous transition during the last several decades. In this type of situation, there are undoubtedly several dangers in addition to the credit risk. These risks have a high probability of causing bank failures or perhaps a domino effect that could result in systemic risk if they occur.

This paper outlines and describes the numerous types of threats that banks are exposed to and critically evaluates and discusses the existing regulatory system’s emphasis on only credit risk. This study also includes several recommendations for methods to strengthen the current system and an argument for considering other hazards.

The Forms of Risk Banks Face

It is possible to categorise risks in various ways, such as according to their risk factors, the extent to which they have an influence or the repercussions of the risks. As stated in this paper, risk research should be conducted to reduce the likelihood and effect of hazards by investigating their sources and consequences (Zavadskas, 2020). The classification of risks according to their causes is emphasised more significantly in this study.

Credit Risk

Credit risks are risks that counterparties, whether members or another organisation, may not completely satisfy their financial commitments when they are required to pay or down the road. Usually, credit risk is significant, and the most frequent risk banks face (Konovalova, 2016). This is due to the increased likelihood that the bank’s financial instruments or loans will not be returned in full or in part when due. Default is frequently accompanied by credit risk.

Market Risk

Market risk is the possibility of losses in a banking book due to changes in asset values, credit spreads, interest rates, commodity prices, foreign exchange rates, and other factors whose values are determined by the public market as other factors.

In the financial world, market risk is a type of speculative risk that only imposes losses whenever the price movements in a particular market are not beneficial to the bank (Sweeting, 2017). As a result of the numerous types of markets and the rapid and wide fluctuation in price movement, market risk has become considerably more sophisticated and difficult to forecast, evaluate, and remove. At the start of a trading session, even tiny losses can balloon into massive losses due to unanticipated price fluctuations in a given market.

Operational Risks

Operational risk deficits in internal processes or informational systems, management failures, human errors, or interruptions from external occurrences will decrease the breakdown or deterioration of services offered by a financial institution (Karam, 2012). Over the previous two decades, many banks have been affected by failing operations, which have hurt some institutions’ future profitability and prospects. When in comparison to other risks like operational risk and market risk, which have been discussed previously, operational risk is far more difficult to understand and even more difficult to monitor, measure, trace, and measure, because of the large number of unknown external and internal factors that can occur.

Liquidity Risk

Liquidity risk can be divided into two categories:

The risk that a company may be unable to receive the funds it requires to continue the smooth functioning of its commercial activities is referred to as funding liquidity risk.

Market liquidity risk refers to the probability of not being able to cancel or reverse a holding in the markets without causing a large and adverse impact on the price of the underlying security.

The ability of a bank to satisfy its obligations on time is referred to as liquidity risk. When a bank doesn’t have enough cash on hand to meet the withdrawal demands of many depositors, a bank run occurs, resulting in panic in the local banking industry and even economic downfall.

Business or Strategic Risk

Business or Strategic risk arises in the quest for long and short-term corporate objectives. Improper strategic choices or future production planning may result in fewer earnings than planned and, in certain cases, losses rather than profits. This risk exists throughout the life span of a bank and will impact the bank’s competitive position due to the rapidly changing environment (Rampini, 2015). Banks must constantly reevaluate and revise their long and short-term objectives and strategies in market share loss or liquidation.

Legal or Compliance Risk

Legal risks have to do with the inability of the bank to comply with laid down rules, laws, and regulations in the market where it is operating. Such actions or inactions result in reputational damage and financial loss. Banks conduct business operations inside a regulated environment. As a result of noncompliance, many banks are now required to pay a vast number of fines, penalties, and legal fees imposed by local governments, the taxation office, bank regulators, law firms, and courts, among other entities, as well as legal fees.

Reputation Risk

The risk of a bank’s reputation capital being depleted due to unforeseen occurrences, market performances, company policy revisions, or unfavourable results from normal business operations is referred to as Reputation Risk. A bank will incur higher losses if its customers’ reputations and faith are damaged. Even if the bank’s systems, day-to-day operations, and capital position are still good (Ellul, 2015). Meanwhile, repairing a tarnished image/reputation will be expensive and time-consuming.

Country Risk

Country risk refers to the unpredictable hazards that can arise due to the cultural, political, security, economic, or other factors affecting the country wherein the banks conduct their business operations. Supposedly, the country is economically and politically unstable. The banks that do business there will suffer greatly due to this.

Systemic Risk

The disturbance of the source of financial services produced by a deterioration of all financial sector components is referred to as Systemic Risk (Clark, 2016). It can have major negative effects on the actual economy. It is defined as: Meaning Systemic Risk refers to the breakdown of the entire financial system, resulting in a general collapse, instead of a single institution failing in a vacuum. Systemic risk emerges in the financial system due to intrinsic structural flaws such as procyclicality, information asymmetries, interdependence, and perverse incentives. Due to these structural problems, the systemic risk might be effective globally or only in a particular country. Countries whose economies are heavily reliant on banks or their financial institutions are primarily operated or controlled by foreign investment are particularly exposed to systemic risk.

Moral Hazard

A moral hazard is any circumstance in which an individual makes a risky decision, while another person takes the price when things go wrong (Stulz, 2008). Moral hazard has been identified as an underlying cause of several financial disasters. Whenever a bank makes a strategic decision, the decision-makers think that if the choice goes wrong and the bank suffers significant losses, they won’t face the consequences straight, but rather, the government or other third parties will. Under moral hazard, bank investors or depositors would be exposed to a high level of risk with no expectation of reward.

The View of Regulators focusing on one risk

The Basic Risk for Banks is Credit Risk

From a historical perspective, lending money to consumers is a fundamental function of financial institutions. The majority of other financial derivates and instruments such as bonds, loans, trade finance, interbank transactions, guarantees, swaps, forward contracts, futures contracts, and even substandard lending, are all in some way or another tied to lending in their fundamental nature (Van Der Hoog, 2017). Priority one for banks should be ensuring that the borrowing loans will be able to gather the main and interest payments without default. Financial firms can survive and grow based on this principle. Otherwise, cascading failures could be triggered, resulting in the emergence of systemic risk. The subprime mortgage crisis in the United States, which triggered the global financial crisis in 2008, is the clearest illustration of credit risk.

A subprime mortgage crisis, in reality, is at the heart of the global financial crisis of 2008. As the name implies, subprime mortgages are loans made to those with bad credit scores and lower incomes than the average person (Catherine, 2020). Those who have been denied the ability to give high-quality mortgages will turn to subprime mortgages to purchase a house. When borrowers fail to satisfy their commitments due to the credit easing strategy and rising house prices, banks may still be able to make money by restructuring or just selling the mortgaged property.

However, as housing bubbles popped and interest rates rose, many lenders found themselves unable to pay back their loans on time. Even if the banks successfully reclaim the property as collateral, they would still suffer significant losses since they would be unable to market the property as collateral for the amount they had anticipated. As a result, the crisis that hit resulted in the collapse of the entire financial system. In the same way as the financial crisis of 2008 crisis was caused by credit risk, there have been several earlier financial crises or examples of bank liquidation throughout history. For banks to avoid credit risk from arising, they must take the following steps:

Other Forms of Risk are Critical to Banks

In recent times, the financial industry accounts for a significant portion of gross domestic product (GDP), particularly in rich and rising developing countries. External and Internal factors, such as business strategy transformation, adoption of modern technologies, and changes in the regulatory environment, have all contributed to the major transformation of financial institutions (Okafor, 2019). Today’s business banks have evolved into a complex ecosystem that offers their customers a wide range of financial solutions. It is far from sufficient just to manage credit risk to meet the standards of modern banks. Other areas of damage are also quite important to financial institutions. Other types of risk will be used as examples in this study to demonstrate how important they are.

Case Study Examples

Bank run of Northern Rock (Northern Rock Case)

A bank based in the United Kingdom that specialises in financing real estate, Northern Rock, declared in 2007 that it needed immediate money from a Bank of England to keep operations running. Northern Rock was indeed a small bank with a limited depositor base, making it unable to fund fresh loans on its own (Rampini, 2020). By selling mortgages it generated to banks and investors and bringing out short-term loans, it became increasingly sensitive to fluctuations in the capital markets. The amount of finance Northern Rock was able to raise was determined by the performance of the overall banking industry.

In times of financial stress, the bank struggled to market the mortgages that originated in the first place. On the other hand, Northern Rock could not get the necessary short-term loans and has been unable to raise more cash, ultimately running out of money. The government eventually seized control of the property. Liquidity risk was the root cause of the Northern Rock debacle. When Northern Rock is experiencing a cash shortage, despite a substantial proportion of non-assets, depositors rush to withdraw their funds, causing the cash deficit to worsen. This is a prime cause of a bank robbery gone wrong.

The Barings case

For trading derivatives on behalf of its clients, Baring Brothers and Co. Ltd (Barings) established a branch in London. The Nikkei Index Futures contract, traded by another one of Baring’s dealers in Singapore, resulted in a GBP20,000 loss in 1992. Even though it’s not a significant loss, the head contracts trader, Nick Lesson, chose to conceal the truth to regain the loss in subsequent trades. Nick was capable of approving his trades and booking them into the bank’s network without any supervision because of insufficient internal control systems and procedures. As a result, he continued to buy, although the price patterns of the Nikkei Average were continually in conflict with his predictions. An earthquake struck the Japanese city of Kobe in 1995, and the price of the Nikkei Index futures plummeted by a factor of several hundred. Nick had incurred a loss of more than GBP 800 million, which had amassed over time. Keeping the loss a secret was no longer possible. Barings fell and went bankrupt in the same year as Barings.

The operational risk was the root cause of Barlings’s situation. So very much damage for Barings was caused by human mistakes and an inadequate internal control mechanism. A growing number of banks have suffered from failing operations over the previous two decades, with serious consequences for the prospects and profitability of some institutions.

It is also possible that market risk was a factor in Barlings’ situation (Murray, 2019). The Nikkei Index futures contract will not be penalised if there is no significant price movement.

Misconduct of Salomon Brothers

Salomon Brothers were detected in 1991, placing purchase orders for the United States government significantly bigger than the amount allowed. To raise finances, the United States government issues debt instruments at auction and invites a select group of institutions to buy these securities, known as Treasury bills. This auction is limited in size since each bank asked to bid can only buy a certain number of Treasury securities to ensure that the securities are accurately priced. Salomon Brothers accumulated a substantial position in Treasury securities through fictitious identities and documents, ultimately exerting control over the price investors were willing to pay for these securities. When the company’s unlawful operations were made public, the cost of Salomon Brothers’ stock plunged precipitously.

Salomon Brothers suffered a significant tarnish on their reputation. Salomon Brothers were subsequently penalised USD 290 million by the United States government, which was the highest fine ever issued against an investment firm at the time. A reputational risk brought about the Salomon Brothers lawsuit. Salomon Brothers’ reputation was harmed due to unethical conduct in a securities transaction, which resulted in a steep reduction in the price of the company’s stock. The Salomon Brothers case was likewise a result of compliance risk, which resulted in the government imposing massive fines on the company.

Analysis and Conclusions from the Three cases

Based on the three situations presented above, we can undoubtedly draw some conclusions.

Firstly all kinds of risks can have a big impact on the sustainability of banks. Three kinds of risks apply Market risk, credit risk, and operational risks. There is evidence of Market risk in the Barings scenario. The Northern Rock scenario shows a liquidity risk, and the Salomon Brothers case shows a reputational risk.

Second, some crises or large-scale losses will be activated by various risks occurring simultaneously and across the entire system. Some types of dangers are associated with one another and are intertwined. When market and operational risk were activated simultaneously, it resulted in massive losses for Barings. Furthermore, in the instance of Salomon Brothers, both compliance and reputational risk occurred simultaneously.

Third, the environment in which banking institutions operate has become more turbulent while also becoming more intelligible. It is illogical to concentrate on one type of danger while ignoring all other risks.

Finally, concentrating solely on credit risk is insufficient to meet the risk assessment requirements of financial institutions. Banks are actively involved in a wide range of risks. As a result, all types of risk, not just credit risk, should be detected, quantified, communicated, responded to, and monitored continually, regardless of the source.

Suggestions on Regulator’s Comprehensive Risk Management

Framework Guidance

The framework must be guided by key organisations that provide direction, guidance and structure on fraud deterrence, internal management, and ERM. COSO is a typical organisation that offers that in a model of the risk management framework. There are many different types of top-down hierarchical structures that have been widely used everywhere in the world. Regarding the bank risk management process, regulators must make full use of the model provided by the Federal Reserve. At the very least, the structural elements for banks should have five components in total.

Risk Identification

Although this article has identified and explained some common risks that banks must deal with, as regulators, they must nevertheless classify them per their importance and features as a first step. Liquidity risk, Credit risk, Operational risk, and market risk are by far the most critical concerns to which regulators should pay greater attention, and they should be prioritised. Business risk, Country risk, Compliance risk, and reputation risk are the types of risks that should be managed primarily by banking institutions since they are highly tied to the bank’s normal operations and are reasonably simple to comprehend and manage.

Exceptions being the non-systemic risks generated by individual banks, financial regulators’ primary role is to avoid and address systemic risk by closely monitoring and restricting banking activity. To address the issues posed by international banking institutions and cross-border financial activities, national financial regulatory agencies should be established, as should international organisations coordinate efforts to address these challenges.

Risk Assessment

Presently, financial regulation is transitioning from compliance to a risk-based supervision model. A risk assessment conducted by authorities is the first and most important stage in risk management. Its task is to determine the categories of risks that banks are exposed to, the degree of risk, the direction in which the risks are evolving, and the capacity to maintain those risks.

The structure should have a collection of Key Risk Indicators that may be used to assess the possibility and potential consequences of various hazards (Macey, 2017). Convergent global indicators or measures are highly recommended, and establishing such indicators or measurements is highly appreciated. The Key Risk Indicators (KRIs) are a set of quantitative or qualitative benchmarks that financial regulators use to plan and assess the risk posed by banks. It also is a collection of fundamental methods for assessing risk.

Basic indicators for key risk indicators (KRIs) should measure the reserve requirements based on the premise that a financial institution can interact its total risk level with regulators by providing them with a single figure. The capital adequacy ratio (CAR) should be the most accurate indicator of the least capital need.

The capital adequacy ratio measures how well a company’s finances are doing CAR = C/(w1A1+w2A2),w1w2 (10.2), where w1 and w2 represent risk weights, and w1 and w2 are the coefficients of determination. It is necessary to develop more indicators in addition to CAR. Banks face four key risks (operational, market, credit, and liquidity) must have an indicator group, which should be distinct from the others. It is important to consider other elements when developing KRIs, such as the surroundings, risk culture, and risk appetite, among other things.

Control Activities

The purpose of management control is to conduct supervision and inspections based on the results of the risk analysis, which comprises the following elements:

Capital Requirements: As previously indicated, it is usually done out under the supervision of the Capital Adequacy Ratio (CAR). When it comes to capital requirements, the authorities must decide if a minimum CAR must be preserved or if it can be decreased in times of crisis.

Bank Risk Score: This assesses the bank’s management framework, which includes the integrity, efficiency of policies and procedures, effectiveness, and techniques for identifying, measuring, monitoring, and controlling risks. It differs from the particular bank’s self-rating and credit ratings from other professional agencies. It can avoid hazards, maintain continuous oversight, and encourage the steady growth of banks. It can be done using KRI calculations and on-site or off-site inspections.

Inspection and checking: To guarantee that risks are properly controlled, authorities should implement risk adjustment and treatment arrangements through off-site monitoring or on-site inspection.

Disclosure

Disclosure requires the openness and transparency of information to enable easy assessment of the bank’s operations. This information serves as a guide for investors and the market and gives bank clients a better understanding of the banks’ operations and risk exposures. All included accounting disclosures, risk exposure, general disclosure requirements, and risk assessments. It is contingent on the dissemination of statistical information to the general public.

Monitoring

Regulation monitoring procedures are used by the regulatory authorities to audit and monitor the activities of financial industry players. They’re concerned about minimising systemic risk or the possibility that one bank’s failure will affect other banks or the industry. The only method to enforce macroprudential restrictions is to keep tabs on banks’ day-to-day operations by restricting the amount of money they lend or the types and nature of banking products they offer to the general public. It is also stated that procyclicality is a significant issue in banking and capital. When the economy is doing well, Banks experience a boom, and they can fulfil their lending obligations to the extent that they start boring low-quality borrowers who may default (Baker & Filbeck, 2015). This causes a bubble, especially as has been seen in real estate. Eventually, the bubble bursts and the low-quality lenders are unable to fulfil their payments making it difficult to lend to additional people.

Conclusion

There is no question that banks are exposed to a variety of risks. Market risk: Credit, liquidity, and operational risks are the key risks that banks face. The bank’s other types of risk include reputation risk, strategic risk, nation risk, and compliance risk. Controlling systemic risk and avoiding moral hazards are essential objectives for financial regulators. By examining the sources and consequences of risks, risk research should be carried out to lessen the likelihood and impact. Market risk is more complex and difficult to foresee, analyse, and eliminate. Operational risk is far more difficult to comprehend and monitor, measure, trace, and measure than other types of risk. In the financial markets, risk is the possibility of not being able to cancel or reverse a position in the absence of a significant and adverse impact on the price of the underlying security. A bank run occurs when a financial institution does not have enough cash on hand to meet the withdrawal demands of a large number of depositors.

The experiences of Barings, Northern Rock, and Salomon Brothers demonstrate that a wide range of risks can significantly influence the long-term viability of financial institutions. Some crises or large-scale losses will be triggered by a combination of risks that occur simultaneously in different locations. The banking industry is actively involved in many hazards, not only credit risk. Regulators must make full use of the model established by the Federal Reserve System.

As a result, excellent practice techniques should be able to control various types of risks while avoiding a narrow perspective. Performing comprehensive risk administration and incorporating as much risk into risk assessment are inevitable international trends, even though many regulators and banks only focus on credit risk. Regulatory financial agencies should actively participate in risk assessment methods, identification, control actions, disclosure, and monitoring within the comprehensive risk assessment structure and risk-based supervision. It will help individual banks’ prosperity and overall safety and soundness of the banking system. The framework must be guided by key organizations in the areas of fraud deterrence, internal management, and enterprise risk management (ERM). The capital adequacy ratio (CAR) should be the most accurate indicator of a company’s ability to fund its operations with the least amount of capital. Each risk type must be represented by a separate indicator group. It is critical to take into account other factors such as the surrounding environment, risk culture, and risk appetite, among other things.

References

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Catherine, N. (2020). Credit Risk Management and Financial Performance: A Case of Bank of Africa (U) Limited. Open Journal of Business and Management, 08(01), 30–38. https://doi.org/10.4236/ojbm.2020.81002

Clark, B. (2016). Risk and risk management in the credit card industry. Journal of Banking & Finance, 72, 218–239. https://doi.org/10.1016/j.jbankfin.2016.07.015

Ellul, A. (2015). The Role of Risk Management in Corporate Governance. Annual Review of Financial Economics, 7(1), 279–299. https://doi.org/10.1146/annurev-financial-111414-125820

Karam, E. (2012). Operational Risks in Financial Sectors. Advances in Decision Sciences, 2012, 1–57. https://doi.org/10.1155/2012/385387

Konovalova, N. (2016). Credit Risk Management In Commercial Banks. Polish Journal of Management Studies, 13(2), 90–100. https://doi.org/10.17512/pjms.2016.13.2.09

Macey, J. (2017). Error and Regulatory Risk in Financial Institution Regulation. Supreme Court Economic Review, 25(1), 155–192. https://doi.org/10.1086/694089

Murray, L. (Ed.). (2019). Credit risk and operational risk on the financial performance of universal banks in Ghana: A partial least squared structural equation model (PLS-SEM) approach. Cogent Economics & Finance, 7(1), 1589406. https://doi.org/10.1080/23322039.2019.1589406

Okafor, A. (2019). Research Journal of Finance and Accounting. Bank Risks, Regulatory Interventions and Deconstructing the Focus on Credit Risk. https://doi.org/10.7176/rjfa

Rampini, A. A. (2015). Risk Management in Financial Institutions. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2677051

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Sweeting, P. (2017). Financial Enterprise Risk Management. Financial Enterprise Risk Management. https://doi.org/10.1017/9781316882214

Van Der Hoog, S. (2017). The Limits to Credit Growth: Mitigation Policies and Macroprudential Regulations to Foster Macro-Financial Stability and Sustainable Debt. Computational Economics, 52(3), 873–920. https://doi.org/10.1007/s10614-017-9714-4

Zavadskas, E. K. (2020). Risk identification and prioritisation in banking projects of payment service provider companies: an empirical study. Frontiers of Business Research in China, 14(1). https://doi.org/10.1186/s11782-020-00083-5

Introduction Banks, as the foundation of the financial sector, are critical to

Introduction

Banks, as the foundation of the financial sector, are critical to the growth of the financial sector and, by extension, the growth of the entire economy. It goes without saying that lending is one of the most important duties of a bank. Banks may experience losses as a result of probable defaults by borrowers when they lend money to persons or organizations, according to the perspective of the banks. This is referred to as credit risk, and it has been viewed as a key danger in their everyday operations, while other types of risk have either been overlooked or have received only a little amount of attention.

As a result of external and internal reasons such as the evolution of regulatory regimes, the adoption of new technology, business strategy transformation, and others, the financial services sector has experienced tremendous transition during the last several decades. In this type of situation, there are undoubtedly several dangers in addition to the credit risk. These risks have a high probability of causing bank failures, or perhaps a domino effect that could result in systemic risk if they occur.

This article outlines and describes the numerous types of threats that banks are exposed to, as well as critically evaluates and discusses the existing regulatory system’s emphasis on only credit risk. This study also includes several recommendations for methods to strengthen the current system, as well as an argument for taking other hazards into consideration.

Types of Risks Banks are Exposed to

It is possible to categorize risks in a variety of ways, such as according to their risk factors, the extent to which they have an influence or the repercussions of the risks. As stated in this paper, risk research should be conducted with a view to reducing the likelihood and effect of hazards by investigating their sources and consequences. The classification of risks according to its causes is given more significant emphasis in this study (from Risk 1 – Risk 8). In addition, it will discuss and present various additional types of risks (from Risk 9 – Risk 10)

Credit Risk

Credit risks are risks that counterparties, whether a members or another organization, may be unable to completely satisfy its financial commitments when they are required to pay, or at any point down the road.

Usually, credit risk is a significant and most frequent risk faced by banks. This is due to the increased likelihood that the bank’s financial instruments or loans will not be returned in full or in part when they are due. Default is frequently accompanied by credit risk.

Market Risk

Market risk is said to be the possibility of losses in a banking book as a result of changes in asset values, credit spreads, interest rates, commodity prices, foreign exchange rates and other factors whose values are determined by the public market, as well as other factors.

In the financial world, market risk is a type of speculative risk that only imposes losses whenever the price movements in a particular market are not beneficial to the bank. As a result of the numerous types of markets and the rapid and wide fluctuation in price movement, market risk has become considerably more sophisticated and difficult to forecast, evaluate, and remove. Even tiny losses at the start of a trading session can balloon into massive losses as a result of unanticipated price fluctuations in a given market.

Operational Risks

Operational Risk is one that deficits in internal processes or informational systems, management failures, human errors, or interruptions from external occurrences will lead in the decrease, breakdown, or deterioration of services offered by a financial institution.

Over the previous two decades, a growing number of banks have been affected by failing operations, which have had a negative impact on the future profitability and prospects of some institutions.

When in comparison to other risks like operational risk and market risk, which have been discussed previously, operational risk is far more difficult to understand and even more difficult to monitor, measure, trace, and measure, because of the large number of unknown external and internal factors that can occur.

Liquidity Risk

Liquidity risk can be divided into two categories:

The risk that a company may be unable to receive the funds it requires to continue the smooth functioning of its commercial activities is referred to as funding liquidity risk.

Market liquidity risk refers to the probability of not being able to cancel or reverse a holding in the markets without causing a large and adverse impact on the price of the underlying security.

The ability of a bank to satisfy its own obligations on time is referred to as liquidity risk. When a bank doesn’t have enough cash on hand to meet the withdrawal demands of a significant number of depositors, a bank run occurs which can result in panic in the local banking industry and even economic downfall.

Business or Strategic Risk

Business or Strategic risk arises in the quest for long and short-term corporate objectives. Improper strategic choices or future production planning may result in fewer earnings than planned, and in certain cases, losses rather than profits.

This risk exists throughout the life span of a bank and will have an impact on the bank’s competitive position as a result of the rapidly changing environment. In the event of market share loss or liquidation, banks must constantly reevaluate and revise their long and short-term objectives and strategies.

Legal or Compliance Risk

Legal or Compliance Risk is the danger of unanticipated rule application, laws, codes of conduct, regulations, or other financial institution standards, which typically results in a financial loss to the bank.

Banks operate inside a regulated environment. As a result of noncompliance, many banks are now required to pay a vast number of fines, penalties, and legal fees imposed by local governments, the taxation office, bank regulators, law firms, and courts, among other entities, as well as legal fees.

Reputation Risk

The risk of a bank’s reputation capital being depleted as a result of unforeseen occurrences, market performances, company policy revisions, or unfavorable results from normal business operations is referred to as Reputation Risk.

A bank will incur higher losses if its customers’ reputations and faith are damaged. This is true even if the bank’s systems, day-to-day operations, and capital position are still in good shape. Meanwhile, repairing a tarnished image/reputation will be expensive and time-consuming to undertake.

Country Risk

Country risk refers to the unpredictable hazards that can arise as a result of the cultural, political, security, economic, or other factors affecting the country wherein the banks conduct their business operations.

Supposedly, the country is economically and politically unstable, it goes without saying that the banks that do business there will suffer greatly as a result of this.

Systemic Risk

It is the disturbance of the source of financial services produced by a deterioration of all components of the financial sector that is referred to as Systemic Risk. It has the capacity to have major negative effects for the actual economy, and it is defined as follows: Meaning , Systemic Risk refers to the breakdown of the entire financial system, resulting in a general collapse, as opposed to a single institution failing in a vacuum.

Systemic risk emerges in the financial system as a result of intrinsic structural flaws such as procyclicality, information asymmetries, interdependence, and perverse incentives. Systemic risk might be effective globally or only in a particular country as a result of these structural problems. Countries whose economies are heavily reliant on banks or their financial institutions are primarily operated or controlled by foreign investment are particularly exposed to systemic risk.

Moral Hazard

Moral hazard is any circumstance in which an individual makes the choice as to how much hazard is taken, while another person takes the price if things go wrong. Moral hazard, according to Mark Zandi, an economist of Moody’s Analytics, has been identified as an underlying cause of several financial disasters.

Whenever a bank makes a strategic decision, the decision-makers think that if the choice goes wrong and the bank suffers significant losses, they won’t face the consequences straight but rather, the government or other third parties will. By virtue of moral hazard, bank investors or depositors or would be exposed to a high level of risk with no expectation of reward.

The Primary Focus on if Credit Risk is Enough or Not Enough?

Based on the explanation and identification provided above, we may conclude that banks are exposed to a wide range of risks. A lender may fail to pay his house equity loan, the interest rate may reduce, reducing the cost of a bank’s assets; a computer error may result in a loss; a bank may not have enough money to meet the demands of depositors withdrawing money; top executives might make a poor decision to launch new businesses in the market. Every day, a bank needs to deal with a slew of hazards that must be managed. Is a primary focus on credit risk, however, sufficient or insufficient? First and foremost, it is accurate that credit risk is a fundamental risk for financial institutions.

The Basic Risk for Banks is Credit Risk

From a historical perspective, lending money to consumers is a fundamental function of financial institutions. The majority of other financial derivates and instruments such as bonds, loans, trade finance, interbank transactions, guarantees, swaps, forward contracts, future contracts, and even substandard lending, are all in some way or another tied to lending in their fundamental nature. Priority one for banks should be ensuring that the borrowing loans will be able to gather the main and interest payments without default. Financial firms can survive and grow on the basis of this principle. Otherwise, cascading failures could be triggered, resulting in the emergence of systemic risk. The subprime mortgage crisis in the United States, which triggered the global financial crisis in 2008, is the clearest illustration of credit risk.

A subprime mortgage crisis, in reality, is at the heart of the global financial crisis of 2008. Subprime mortgages, as the name implies, are loans made to those who have bad credit scores and lower incomes than the average person. Those who have been denied the ability to give high-quality mortgages will turn to subprime mortgages in order to purchase a house. When borrowers fail to satisfy their commitments as a result of the credit easing strategy and rising house prices, banks may still be able to make money by restructuring or just selling the mortgaged property. However, as housing bubbles pop and interest rates rose, a substantial number of lenders found themselves unable to pay back their loans on time. Even if the banks were successful in reclaiming the property as collateral, they would still suffer significant losses since they would be unable to market the property as collateral for the amount they had anticipated. As a result, the crisis that hit, which resulted in the collapse of the entire financial system.

In the same way as the financial crisis of 2008 crisis was caused by credit risk, there have been several earlier financial crises or examples of bank liquidation throughout history. In order for banks to avoid credit risk from arising, they must take the following steps:

Other Forms of Risk are Critical to Banks

Lately, the financial industry accounts for a significant portion of gross domestic product (GDP), particularly in rich and rising developing countries. External and Internal factors, such as business strategy transformation, adoption of modern technologies, and changes in the regulatory environment, have all contributed to the major transformation of financial institutions. Today’s business banks have evolved into a very complex ecosystem that offers a wide range of financial solutions to their customers. It is far from sufficient to just manage credit risk in order to meet the standards of modern banks. Other areas of damage are also quite important to financial institutions. Other types of risk will be used as examples in this study to demonstrate how important they are.

The collapse of Barings (Barings case)

For the purpose of trading derivatives on behalf of its clients, Baring Brothers and Co. Ltd (Barings) established a branch in London. The Nikkei Index Futures contract, which was traded by another one of Baring’s dealers in Singapore, resulted in a GBP20,000 loss in 1992. Even though it’s not a significant loss, the head contracts trader, Nick Lesson, chose to conceal the truth in order to regain the loss in subsequent trades. Nick was capable of approving his own trades and book them into the bank’s network without the need for any supervision because of insufficient internal control systems and procedures in place. As a result, he continued to buy, although the price patterns of the Nikkei Average were continually in conflict with his predictions. An earthquake struck the Japanese city of Kobe in 1995, and the price of the Nikkei Index futures plummeted by a factor of several hundred. Nick had incurred a loss of more than GBP 800 million, which had amassed over time. Keeping the loss a secret was no longer possible. Barings fell and went bankrupt in the same year as Barings.

Operational risk was the root cause of Barlings’s situation. So very many damages for Barings were caused by human mistake and an inadequate internal control mechanism. A growing number of banks have suffered from failing operations over the previous two decades, with serious consequences for the prospects and profitability of some institutions

It is also possible that market risk was a factor in Barlings’ situation. The Nikkei Index futures contract will not be penalised if there is no significant price movement.

Bank run of Northern Rock (Northern Rock Case)

A bank based in the United Kingdom that specializes in financing real estate, Northern Rock, declared in 2007 that it needed immediate money from a Bank of England to keep operations running. Northern Rock was indeed a small bank with a limited depositor base, making it unable to fund fresh loans on its own. Through selling mortgages it generated to banks and investors, as well as by bringing out short-term loans, it became increasingly sensitive to fluctuations in the capital markets. The amount of finance Northern Rock was able to raise was determined by the performance of the overall banking industry. In times of financial stress, the bank struggled to market the mortgages that it had originated in the first place. Northern Rock, on the other hand, was unable to get the necessary short-term loans and has been unable to raise more cash, ultimately running out of money. The government eventually seized control of the property.

Liquidity risk was the root cause of the Northern Rock debacle. When Northern Rock is believed to be experiencing a cash shortage, even though it has a substantial proportion of non assets, depositors rush to withdraw their funds, causing the cash deficit to become even worse. This is a prime case of a bank robbery gone wrong.

Misconduct of Salomon Brothers

Salomon Brothers were detected in 1991 placing purchase orders for the United States government that were significantly bigger than the amount allowed. In order to raise finances, the United States government issues debt instruments at auction and invites a select group of institutions to buy these securities, known as Treasury bills. This auction is limited in size since each bank asked to bid can only buy a certain number of Treasury securities in order to ensure that the securities are accurately priced. Salomon Brothers accumulated a substantial position in Treasury securities through the use of fictitious identities and documents, ultimately exerting control over the price at which investors were willing to pay for these securities. When the company’s unlawful operations were made public, the cost of Salomon Brothers’ stock plunged precipitously. Salomon Brothers suffered a significant tarnish on their reputation. Salomon Brothers was subsequently penalised USD 290 million by the United States government, which was the highest fine ever issued against an investment firm at the time.

The Salomon Brothers lawsuit was brought about by a reputational risk. Salomon Brothers’ reputation was harmed as a result of unethical conduct in a securities transaction, which resulted in a precipitous reduction in the price of the company’s stock.

The Salomon Brothers case was likewise a result of compliance risk, which resulted in the government imposing massive fines on the company.

Drawn from the Three Cases are several conclusions.

On the basis of the three situations presented above, we can undoubtedly draw some conclusions.

First and foremost, not only credit risk, but risks such as operational risk and market risk also, and the market risk in the Barings scenario, liquidity risk in the Northern Rock scenario, compliance and reputation risk in the Salomon Brothers case, can have a serious impact on a bank and result in significant losses without any foreseeability.

Second, some crises or large-scale losses will be activated by various of risks occuring at the same time and across the entire system. Some types of dangers are associated with one another and are intertwined with one another in some ways. When market and operational risk were all activated at the same time, it resulted in massive losses for Barings. Furthermore, in the instance of Salomon Brothers, both compliance and reputational risk occurred simultaneously.

Third, the environment in which banking institutions operate has become more turbulent while also becoming more intelligible. It is illogical to concentrate just on one type of danger while ignoring all other types of risks.

Finally, concentrating solely on credit risk is clearly insufficient to meet the risk assessment requirements of financial institutions. Banks are actively involved in a wide range of risks. As a result, all types of risk, not just credit risk, should be detected, quantified, communicated, responded to, and monitored on a continual basis, regardless of the source.

Suggestions on Comprehensive Risk Management

Because concentrating solely on credit risk is insufficient and is one-sided, this article proposes the notion of extensive risk management, which is intended to handle a broad range of potential hazards that may affect banks within an integrated and unified framework.

The Components of the Framework

The COSO (Committee of Sponsoring Organizations of the Treadway Commission) is an organization that provides thought leadership and direction on fraud deterrence, internal management, and enterprise risk management. COSO is a member of the Treadway Commission. COSO published a model for a risk management framework, which is depicted in the chart below.

There are many different types of top-down hierarchical structures that have been widely used everywhere the world. Regarding the bank risk management process, regulators must make full use of the model provided by the Federal Reserve. At the very least, the elements of the structure for banks should have five components in total. It is depicted in the chart to the right.

Risk Identification

Despite the fact that this article has identified and explained some common risks that banks must deal with, as regulators, they must nevertheless classify them per the its importance and features as a first step.

Liquidity risk, Credit risk, Operational risk, and market risk are by far the most critical concerns to which regulators should pay greater attention, and they should be prioritized. Business risk, Country risk, Compliance risk, and reputation risk are the types of risks that should be managed primarily by banking institutions since they are highly tied to the normal operations of the bank and are reasonably simple to comprehend and manage.

Exceptions being the non-systemic risks that are generated by individual banks, financial regulators’ primary role is to avoid and address systemic risk by closely monitoring and restricting banking activity. To address the issues posed by international banking institutions and cross-border financial activities, national financial regulatory agencies should be established, as should international organizations to coordinate efforts to address these challenges.

Risk Assessment

Presently, financial regulation is transitioning from a compliance to a risk-based model of supervision. A risk assessment conducted by authorities is the first and most important stage in risk management. Its task is to determine the categories of risks that banks are exposed to, the degree of risk that they are exposed to, the direction in which the risks are evolving, and the capacity to maintain those risks.

The structure should have a collection of Key Risk Indicators that may be used to assess the possibility and potential consequences of various hazards. Convergent global indicators or measures are highly recommended, and the establishment of such indicators or measurements is highly appreciated. The Key Risk Indicators (KRIs) are a set of quantitative or qualitative benchmarks that financial regulators use to plan and assess the risk posed by banks. It also is a collection of fundamental methods for assessing risk.

Below is a KRIs List Format issued by the Chinese Banking Management Board of the Central Government, which can be used as a guideline for developing KRIs.

Basic indicators for key risk indicators (KRIs) should be a measure for the reserve requirements that is based on the premise that a financial institution is able to interact its total risk level to supervisors by providing them with a single figure. The capital adequacy ratio short for CAR, which appears as an Indicator in No.16 in the preceding table, should be the most accurate indicator of the least capital need.

The capital adequacy ratio is a measure of how well a company’s finances are doing. CAR = C/A>=, where is the minimal CAR established by banking laws, and A is the average CAR.

As a result, the ratio is often risk-sensitive, meaning that reduced assets add less to the base than high-risk assets in many instances. CAR = C/(w1A1 + w2A2), w1 w2 (10.2) in this scenario, whereby w1 and w2 represent risk weights, and w1 and w2 are the coefficients of determination

It is necessary to develop more indicators in addition to CAR. Each of the four key risks faced by banks (operational risk, market risk, credit risk, and liquidity risk) must have its own indicator group, which should be distinct from the others. It is important to take into consideration other elements when developing KRIs, such as the surroundings, risk culture, and risk appetite, among other things.

Control Activities

The purpose of management control is to conduct supervision and inspections based on the results of the risk analysis, which comprises the following elements:

Capital Requirements: As previously indicated, it is usually done out under the supervision of the Capital Adequacy Ratio (CAR). When it comes to capital requirements, the authorities must decide if a minimum CAR must be preserved or if it can be decreased in times of crisis.

Bank Risk Score: This is the process of assessing and assessing the bank’s management framework, which includes the integrity, efficiency of policies and procedures, effectiveness, and techniques for identifying, measuring, monitoring, and controlling risks. It differs from the particular bank’s self-rating and credit ratings from other professional agencies. It is able to avoid hazards, maintain continuous oversight, and encourage the steady growth of banks. It can be done using KRI calculations and on-site or off-site inspections.

Inspection and checking: To guarantee that risks are properly controlled, authorities should implement some risk adjustment and risk treatment arrangements through off-site monitoring or on-site inspection. It is, in essence, the risk response procedures of risk rescue, correction, and market exit.

Disclosure

The release of material data that enables a proper assessment of a bank’s activity is known as disclosure. This information serves as a guide for investors and the market, as well as giving bank clients a better understanding of the banks’ operations and risk exposures. Accounting disclosures, risk exposure, general disclosure requirements, and risk assessments are all included. It is contingent on the dissemination of statistical information to the general public.

Monitoring

Macroprudential regulations, which are aimed to protect the banking and financial system as a whole, are used by financial regulators to monitor the entire financial sector domestically or globally. They’re concerned about minimizing systemic risk, or the possibility that one bank’s failure will affect other banks or the industry as a whole. The only method to enforce macroprudential restrictions is to keep tabs on banks’ day-to-day operations by restricting the amount of money they lend or the types and nature of banking products they offer to the general public.

It is also stated that pro-cyclicality is a significant issue in banking and capital. When the economy is performing well, banks have enough of cash to lend out, but they frequently discover that high-quality borrowers already have all the credit they require. As a result, banks begin to lend to progressively low-quality borrowers, frequently in the real-estate industry, causing a real-estate bubble. When the bubble pops and the sector starts to turn for the worst, banks are faced with a huge number of defaults and must drastically reduce lending. Bank capital restrictions amplify the banking industry’s inherent pro-cyclicality. As a result, regulators should think about it carefully while monitoring and make prudential judgments based on macro-prudential regulations.

Conclusion

There is no question that banks are exposed to a variety of risks. Market risk Credit risk, liquidity risk, and Operational risk are the key risks that banks face. Other types of risk that the bank faces include reputation risk, strategic risk, nation risk, and compliance risk. Controlling systemic risk and avoiding moral hazard are essential objectives for financial regulators.

As a result, excellent practice techniques should be able to control various types of risks while avoiding a narrow perspective. Performing comprehensive risk administration and incorporating as much risk as feasible into risk assessment are inevitable international trends, despite the fact that many regulators and banks only focus on credit risk.

Regulatory financial agencies should actively participate in the methods of risk assessment, risk identification, control actions, disclosure, and monitoring within the comprehensive risk assessment structure and risk-based supervision. It will help not only individual banks’ prosperity, but also the banking system’s overall safety and soundness.