The Types of Financial Risks Faced by Banks

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Where money is involved, there are always huge risks involved as well; and, the most important place for money is the bank. There are numerous types of financial risks faced by banks. The most common ones can be defined as the risks associated with maintaining accounts, issuing loans and collecting debts. Even the slightest mistake in these processes can attach the term ‘rupt’ with the bank – ‘bankrupt! Therefore, it is quite important for a bank to make sure it faces all financial risks appropriately.

Here are some of the most common financial risks which a bank faces:

Paying Creditors:

Banks usually have a large network of clients. These clients deposit their money into the bank. The bank utilizes these funds to provide loans to other clients. The bank pays its clients a small percentage of the interest the bank itself is receiving from the borrower. The risk every bank faces here is of all of its clients withdrawing their money at the same time. If such a situation happens, the bank will not be in the position to accommodate the demands. Henceforth, the bank will become bankrupt. This is probably the biggest risk a bank faces while operating.

Recovery from Debtors:

Another risky situation for a bank is to recover the loan amount along with the interest from the debtors. If the bank does not do this, it won’t be able to pay the creditors. The major income for a bank is through the interest rates charged from the debtors. If the loan is not paid back by the debtors, the bank will bear losses. Therefore, this aspect is the second major risk factor for a bank to deal with.

Errors made by Machines and Humans:

The organizational structure of a bank is always dependant upon human and electronic resources. There are errors made by both resource types. However, it is the responsibility of the bank to make sure that these errors are minimal or they might affect the profit and loss ratios.

Further reading: Corporate Governance | Audit | Performance Improvement

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