ELLA MAE S.

OMBID BSBA FM4

Risk Management in the Banking Sector

Instructions: Watch and finish the video entitled "Risk Management System in the
Banking Sector". Answer the following questions below based on the video presented to
you.

QUESTIONS:

1. Explain briefly the categories of risks in banks.

 There are two main categories of risks in banks: systematic and

unsystematic risks. Systematic risk is also known as non-diversifiable or
volatility risk. It is beyond the control of a specific company or individual,
and hence, can’t be diversified. All investments and securities suffer from
such a type of risk. For example, inflation and interest rate changes affect
the entire market. So, one can only avoid it by not investing in any risky
assets. While, the Unsystematic risk is also known as diversifiable risk.
These risks exist within the company and can be controlled or reduced if
proper action is taken. Example of unsystematic risk labor strike and
managerial change they can reduce this risk through appropriate
diversification.

2. Explain briefly the common types of bank risks.

There are seven common types of risk banks exposed to: Operational risk,
market risk, Liquidity risk, compliance risk, reputational risk, credit risk, and
business risk. Operational risk all banks are prone to human errors or mistakes
to a certain extent. This is known as an operational risk. It comes from losses
caused by a bank as a result of poor internal systems, personnel, or external
events. This might include private information being exposed or an employee
making poor judgment. Market risk also known as systematic risk, Investment
banks are highly vulnerable to changes in financial markets. This is because they
hold more financial assets for themselves and their customers, such as
shares and bonds.  A change in interest rates, the price of an item, or the
exchange rate of a currency, for example, can all be causes of market risk.
Liquidity risk arises when assets or securities cannot be liquidated (not
converted into cash quickly) enough to ride a particularly volatile market. This
type of risk has an impact on a company's, corporations, or individual's capacity
to repay obligations without incurring losses. Compliance Risk failure to comply
with federal laws or industry regulations, it can lead to financial forfeiture,
reputational damage and legal penalties. Reputational Risk Any possible harm
to a bank's brand or reputation. Consumers often lose faith in your company,
which has a negative influence on all aspects of operation, including employee
 and consumer trust, customer satisfaction, customer retention, revenue
generation, and so on. Credit Risk is the risk of loss resulting from a borrower's
failure to repay a loan. It typically refers to the risk that a lender will not obtain the
owed principal and interest, resulting in an interruption in cash flows and higher
collection expenses. Business risk refers to a company's exposure to different
variables such as competition, customer preferences, and other factors that
might reduce profitability or endanger the company's success. Earnings risk is
the amount of change in net income caused by interest rate fluctuations over a
particular time. It helps investors and risk experts to understand the impact of
interest rate changes on a company's financial situation and cash flow.

3. What are the seven tenets of risk management in banking industry?

1. Establish a language system to discuss and categories risk.

2. Develop a “Big Picture” view of risk exposure and focus on the most important.
3. Centralize ownership of process and decentralize decision making.
4. Drive the process from the top and clearly define roles and responsibilities.
5. Quantify risk exposure and the cost and benefits of management risks.
6. Embed IT systems to facilitate the risk management process.
7. Embed a risk management culture.

4. What are the obstacles to risk management in banks?

5. What is the importance of risk management to the banking industry?