TAN, HERDRETH MEIDEL P.

AC 3104 (3:00-4:30 TTH)

Financial Institution Risks Management of How Affected by the

Risks Pandemic
Commercial Bank Liquidity Risk (bank To manage Credit Increased demand
not be able to meet risks, commercial for credits since: (1)
its obligations if the banks must conduct businesses are
depositors come in thorough check and staying afloat with
to withdraw their sanctions loans only the decline of their
money), Operational to individuals and cash flows (2)
Risk, Market Risk businesses that are increased
(large amount of not likely to run out unemployment
equity, exposed to of income over the amongst individuals
equity risk, Credit period of the loan.
Risk (delayed They should also use
payments), Systemic contracts like
Risk (The failure of forwards, options
one bank has the and swaps, banks are
possibility to cause able to almost
the failure of many eliminate market
other banks) risks from their
balance sheet.
Credit Union and Liquidity Risk, Credit - Develop a risk Increased number of
Finance Company Risk (Majority of management borrowing members
funds in FCs are structure that due to the pandemic.
allocated as loans to improves efficiencies, However, a risk of
consumers and quells or eliminates default since people
businesses), Interest risks and keeps the have means of
Rate Risk Loans have examiners happy. - earning.
short or intermediate Common
maturities, so their riskavoidance
asset portfolios are activities are
rate sensitive. underwriting
standards, hedges or
asset-liability
matches,
diversification,
reinsurance or
syndication, and due
 diligence
investigation.
Foreign Exchange Transaction risks, Companies Negatively affected
Market economic risk, implement strategies due to: (1)
Foreign Exchange to minimize these Unemployment (2)
Risk (engages in risks, which usually Decline of Business
financial transactions involve purchasing a Activity (3) Stock
denominated in a financial product to Market Impact
currency other than offset their exposed
the currency), assets or liabilities.
Investment Risk There is a wide range
(whether or not the of products available
company would have for this purpose, the
earned a profit or most commonly used
loss) of which are forward
contracts, options or
futures contracts,
with different costs
and degrees of
complexity.
Mortgage Firms Prepayment Risk - Financial Negatively affected
(borrower will prepay institutions can sell due to people being
the mortgage when mortgages shortly unable to pay their
interest rates fall), after originating mortgage which will
Credit Risk (borrower them. - Financial give rise to credit risk
will make a late institutions maintain since there’s a huge
payment or will adjustablerate likelihood of default.
default), Interest residential
Rate Risk (value of mortgages, and
mortgage will fall invest in fixed-rate
when interest rates mortgages with a
rise) short time remaining
to maturity. -
Financial institutions
that invest funds in
mortgages can hedge
their exposure by
purchasing a credit
default swap.
Insurance Firms Liquidity Risk, Some insurance Negatively impacted
Interest Rate risk companies have since people might
(sensitive to interest reduced their not have the means
rate fluctuations due average maturity on to comply with
to large amounts of securities, which payment of
 fixed-rate, long-term reduces their insurances. However,
debt securities), exposure to interest because of the
Credit Risk, Market rate risk. - To deal pandemic, people
Risk (exposure to with credit risk, they might apply for
possible losses on only invest in insurances due to
stock portfolios securities assigned a ensure that they are
during weak stock high credit rating and backed up in case of
market) they also diversify health emergencies
among securities like these.
issuers to have minor
impact. - Insurers will
often have access to
well developed
markets to hedge
most market risks, or
they may be able to
match cash flows to
minimize market risk.
- Life insurance
companies can
therefore reduce
their exposure to
liquidity risk by
diversifying the age
distribution of their
customer base.
Security Firms Market Risk, Interest Credit risk can be Negatively affected
Rate Risk, Credit Risk, minimized by risk (Operations and
Exchange Rate Risk management and profitability) Firm’s
controls and performance is more
procedures that pronounce when its
require sales revenue is
counterparties to smaller. The public
maintain adequate markets have
collateral, make reduced liquidity.
margin payments,
and have contractual
provisions for
netting. - The
implementation of
strong and effective
risk management and
controls within
securities firms
 promotes stability
throughout the
entire financial
system. - Sound and
e ffective risk
management and
controls promote
both securities firm
and industry stability
which, in turn,
inspires con fidence
in the investing
public and
counterparties. -
Securities firms have
economic and
commercial
incentives to employ
strong risk
management internal
control systems.
Mutual Funds Market risk (value of To mitigate credit Investors might pull
its investment risk, invest in high out their investment
decline because of credit-rated due to doubt of
unavoidable risks securities with a companies
that affect the entire track of paying profitability during
market), Inflation substantial and this time.
Risk (f losing timely interest. - To
purchasing power), mitigate in flation
Interest Rate Risk, risk, parking money
Currency Risk into schemes like
(decline in the stock mutual funds,
exchange rate will which extend risk
reduce your gains (or adjusted returns. -
add to losses), Credit Mutual funds provide
Risk adequate diversi
fication and an
investor can easily
use mutual funds to
spread risks and keep
his/her portfolio safe.
Pension Funds market risk (investor - Asset-liability Decrease in the value
to experience losses modelling (ALM) is a of assets of
due to the factors financial risk companies with
that a ffect the assessment and asset pension plan assets
overall performance planning tool used by that are invested,
of the financial pension funds to help while pension plan
market on which them choose the liabilities increase
he/she is involved.), strategic pension which will negatively
credit risk, pension policy under impact on the overall
risk (underfunded de uncertainty in a liquidity
fined bene fit coherent and
pension plan), consistent balance
political risk, sheet approach.
management risk