|Credit risk is the risk of non-repayment and consequential financial loss suffered by the bank. The credit risk is further classified into credit default risk and concentration risk.
Credit Default Risk: It is the risk emanating from the borrowers due to non-repayment beyond scheduled days.
Concentration Risk: It is the risk emanating when the banks’ loan portfolio is concentration into the segment.
Credit Default Risk arises due to failure by the borrower to repay the amount. The reasons for such non-payment can range from deteriorating financial health of the borrower to borrower’s diversion of the fund.
The concentration risk arises when bank concentrates loan assets into a segment. When a segment experiences a headwind, the concentration risk materialises (i.e. bank experiences significant individual defaults in that segment)
|The balance sheet of the bank is structurally imbalanced, i.e. the term of a major chunk of assets are longer than the terms of funding liabilities. Thus, during the time of stress, the bank may not be able to meet the liability requirements. This can sometimes lead to the bank being insolvent.
|The banking industry is a heavily regulated industry and in the past ten years more so. The continually changing regulations require the bank to invest in significantly in the compliance area to avoid being penalised for non-compliance.
|Operational risk arises due to failed internal controls, people and systems or due to external events. Due to activities such as fraud, limit breaches, systems failures banks suffer heavy losses annually.
|Market risk is the risk of loss arising due to adverse price movements in the on and off-balance sheet instruments. The market risk can be further classified into trading and non-trading risk. The risk of loss increases due to adverse movement in interest rates, credit spreads, prices of equities et al.