RM- Project - Risk Capital at a Bank

Banking Risks

Banks as financial institutions get to a large extent exposed to different types of risks. The success manifest by high return investments in banks is largely determined by how well a bank manages risk. Banking risks can damage the reputation and image of a bank in the market. Furthermore, disruption of the normal activities of a bank can get indicated as a result of banking risks. Because of this, it is necessary to manage all risks in business.

People’s Risks Associated with a Bank

Both human and electronic factors get utilized in banks. In some cases, there is the risk posed by errors on the part of both human and electronic resources. Such risks can translate into effects on the profit and loss ratios. Some of the ways to mitigate people danger in banking mainly get centered in the hiring process. Banks should ensure that competent and qualified individuals get included in the business workforce. Adequate training should be provided to introduce banking personnel on the policies and compliance rules in the banking sector (Kara, Ozkan & Altunbas, 2016).

Financial Risks Experienced by a Bank

The main framework for the operations of the banks includes lending out to consumers after which the money is paid back at a profit for interest. In the aspect of financial risk is the risk associated with credit. Notably, there is the risk of customers not making payments on credit provided. Still, in the same fashion, banks operate in a way that there is an extensive network of clients that deposit money in a bank. From there, a bank can utilize these funds in providing loans at interest to other customers. In this scenario, risks are indicated in the inability of a bank to pay back its borrowers. The failure to pay back borrowers gets usually caused by all clients withdrawing money from banks at the same time. As a result, recovery from debtors and the inability to pay creditors raises the possibility of bankruptcy.

Liquidity risk is another form of financial risks experienced by banks. According to Christensen, & Tågmark (2016), liquidity risk gets posed when a bank fails to meet its obligations when faced with trouble. In most cases, banks have to liquidate its assets or conduct an expensive financing for it to achieve its dues. On the other hand, there are market factors to financial risks in banking. Changes in the marketplace such as variations in interest rates, market prices, and currency risks result in financial risks. In addition to this are commodity risks and foreign exchange risks. Regulations on the handling of finances in a bank should be implemented to control and balance the investments coming in and going out of a bank. Furthermore, effective policies should get enacted on the borrowing of loans from banks.

Operational Risks for a Bank

Operational risks get indicated by the failure to have adequate internal controls. Internal controls get demonstrated in the delivery, execution, and process management. Examples of failures in internal controls include; accounting errors, negligent loss of clients assets, and failure to meet legal reporting requirement. Internal fraud is a type of operational risk. Internal fraud involves bank staff who can get associated with acts of stealing of company resources and assets. Furthermore, bank staff covers up errors and take client information. Another form of internal fraud includes bribery and intentional mismarking of positions. Secondly, external fraud is another type of operational risks that involves non-staff members of a bank. Non-bank staff can take part in criminal activities such as the hacking of a banks' systems, forgery, and third-party theft. Damage to physical assets is another form of operational risks. To expand on this, factors such as natural disasters and vandalism can adversely affect and destroy the property of a bank. Compliance risk is a form of operational risk and involves the breaching of statutory obligations, breaching legal enactments, and loss of reputation (Anghelache, Marinescu, Popescu-Cruceru & Sacala, 2016).

Employment practices and workplace safety is another form of operational risk. Every business organization is expected to adhere to the place of work safety rules. In addition to this, other rules such as workers compensation claims, discriminatory staff policies, and employee health and security issues should remain followed. Any shortcomings in the implementation of these laws pose adverse effects on a bank. Concerning this are the clients, products, and business practice. Any form of defect in any of these areas poses a potential risk on companies. Identically, are the elements of anti-trust issues, market manipulation, bank product defects, account churning, and fiduciary breaches. An example of these risks is the mortgage debacle. Some ways to manage operational risks in banking, several steps should get taken. First, the information technology systems utilized in a bank should be the latest and the most efficient in the market. Frequent updates should also get conducted to use modern forms of information systems. Furthermore, back-ups should get created in case of failures in the systems of banks. Subsequently, the risk of loss of information and data gets prevented. Lastly, security measures and checks should be conducted to identify any breaches and risks exposed to a bank (Kara, Ozkan & Altunbas, 2016).

Reference

Anghelache, G. V., Marinescu, R. T., Popescu-Cruceru, A. S., & Sacala, C. (2016). Models for the identification and analysis of banking Risks. Romanian Statistical Review Supplement, 64(5), 149-154.

Christensen, M., & Tågmark, D. (2016). Banking risks and the risk of banking: A quantitative study on risk for banks using key indicators.

Kara, A., Ozkan, A., & Altunbas, Y. (2016). Securitisation and banking risk: what do we know so far? Review of Behavioral Finance, 8(1), 2-16.

Module 02 Course Project - Banking Risks

Scoring Rubric:

You did a good job describing people, financial and operational risks, as well as how banks may mitigate each of these risks the banking industry as a whole. For your course project papers, make sure your research is focused on your bank. You also did a good job describing how these risks could be mitigated. This should have also been targeted at the bank you selected.

APA formatting was written well, great job.

Thanks,