The Banking sector, surrounded and exposed to risk or losses. Thus, it’s essential to logically adopt a risk management policy to minimize the sector’s potential losses. It is necessary to analyze and identify the risk to determine the actions to be implemented by banks.
All banks like columbia bank medford re exposed to a potential risk for which they’ll first identify the various risks encircling the banking sector. For instance, the process of channelizing funds and pooling them for lending inherits risk in the process.
Theoretically, the banking sector is exposed to the following four risk factors which should be taken care of.
- Credit risk: The bank’s potential to run into a credit risk is very likable as its primary function is lending. There are high chances of more defaults because of the asymmetric information risk the banking sector is exposed to.
- Liquidity risk: Heavy cash withdrawals by investors while the borrower loan hasn’t matured yet, leads to liquidity risk. It can also cause insolvency problems for the bank. The bank will then have to borrow to fulfill its cash flow obligations immediately.
- Market risk: Sudden decline in asset prices exposes the market to undesirable risks. However, such risks can be diversified by buying derivatives that fix the price of an asset.
- Interest risk: Fluctuating interest rates substantially affects the bank’s profit as the bank has performed lending and borrowing activities at different rates. Consequently, such a change in interest leads to interest risk in the banking sector.
|133 NJ-70, Medford|
|NJ 08055, United States|
|Phone: +1 609-953-4780|
The various financial institutions can monitor credit risk in acceptable parameters to prevent from running into financial crises. The other method that can be adopted is through hedging. This method ensures its offsets investment losses by taking the opposite position in contracts.