How to manage core risk in Bank?

Core Risks in Banks

Main risks involve in Banks:

Credit Risk:  The danger of default by a borrower to whom a bank has extended it credit.

Liquidity Risk: The danger of having insufficient cash to meet bank’s obligations when due.

Market Risks: The danger of changing market values of bank’s assets, liabilities, and equity that may bring about loss.

Pro-cyclical and counter-cyclical

Pro-cyclical: An economic variable positively correlates with and grows in parallel with the overall economy is pro-cyclical.


Counter-cyclical: Those variables that increase when the overall economy is slowing down are counter-cyclical.

Example: Personal incomes and business profits generally rise when the economy is growing, ie. pro-cyclical.
Unemployment is counter-cyclical because it rises when the economy weakens.

The financial regulations of Basel 2 are critized for possibly being pro-cyclical.
Under Basel 2, banks must increase their capital ratios when they face greater risk. This might mean they have less to lend in a recession, which could make the economic downturn worse.

Risks in Banking and Financial Services

1. Asset Risk
2. Basis Risk
3. Balance Sheet Risk
4. Core Risks
5. Counter party Risk
6. Country Risk
7. Computer Systems Risk
8. Compliance Risk
9. Call Risk
10. Concentration Risk
11. Credit Spread Risk or Downgrade Risk
12. Credit Risk
13.Detection Risk
14. Default or Credit Risk
15. Economic Risk
16. Exchange Risk
17. Foreign Exchange Risk
18. Fudning Risk
19. Facility Risk
20. Gap or Mismatch Risk
21. Integrity Risk
22. Interest Rate Risk
23. Location Risk
24. Liquidity Risk
25. Market Risk
26. Operational Risks
27. Price Risk
28. Political Risk
29. Reputation Risk
30. Systematic or Intrinsic Risk
31. Sovereign Risk
32. Strategic Risk
33. Time Risk
34. Transaction Risk
35. Transfer Risk.

Risks Defined

1. Credit Risk: arises from an obligator's failure to perform as agreed.

2. Interest Rate Risk: arises from movement in interest rate in the market. The interest rate exposure is created from the mismatches in the interest rates of assets and liabilities of an organization.

3. Liquidity Risk: arises from an organization's inability to meet its obligations when due. The liquidity exposure is created by the maturity mismatchmes of the assets and liabilities of the organization. This risk is measured through tenor-wise cumulative gaps.

4. Price Risk: arises from changes in the value of trading positions in the interest rate, foreign exchange, equity and commodities markets. This arises due to changes in the various market rates and/or market factors.

5. Compliance Risk: arises from violations of or non-compliance with laws, rules, regulations, prescribed practices or ethical standards.

6. Strategic Risk: arises from adverse business decisions or improper implementation of them.

7. Reputation Risk: arises from negative public opinion.

8. Market Risk: is defined as the potential changes in the current economic value of a position (i.e. its market value) due to changes in the associated underlying market risk factors. Trading positions are subject to mark-to-market accounting ie. positions are revalued based on current market value.

9. Operation Risk: is loss resulting from inadequate or failed internal process, people and systems or from external events. These includes fraud risk, communication risk, documentation risk, cultural risk, external events risk, legal risk, regulatory risk, system risk and so on.

Six risky areas of Bank

Risk management in banks covers six risky areas: These are-

1. Credit risk
2. Foreign Exchange risk
3. Asset-Liability management risk
4. Money Laundering Prevention risk
5. Internal Control & Compliance risk
6. Information and Communication Technology risk