THE RISK A BANK TAKES EVERY DAY

INTRODUCTION Every day a bank opens its door for business they are taking risks. Risks are a part of any business. The following notes will introduce the types of risk a bank takes every day.

1. Commercial Risk Definition: the risk a company takes by offering credit with no collateral, essentially offering financing with no collateral.

Commercial Risk Example Logan is the owner of a company which provides oil pipes to energy companies. His work, extremely technical, is a good fit for his personality. Logan wants to change insurance plans. For this, he will need a commercial risk assessment. He has his CFO pull up the figures on trade credit so he can provide this to the insurer.CFO Next, Logan wants to take out a bank loan. To do this he will need the same figures. The bank wants to measure the risk of Logan's business failing. Commercial risk is a good part of this. Logan very much appreciates his CFO now. With these figures in hand he can complete his work. This way, Logan can get the support he needs to continue his business.

Regulatory Risk Definition: The risk that a change in laws and regulations will materially impact a security, business, sector or market security

Regulatory Risk Example Utilities, such as natural gas and water, face a significant amount of regulation in the way they operate, including the quality of infrastructure and the amount that can be charged to customers. For this reason, these companies face regulatory risk that can arise from events - such as a change in the fees they can charge - that may make operating the business more difficult. business

Liquidity Risk - The risk stemming from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize a loss.risk

Liquidity Risk Example Northern Rock Northern Rock suffered from funding liquidity risk in September 2007 following the sub-prime crisis. The firm suffered from liquidity issues despite being solvent at the time, because maturing loans and deposits could not be renewed in the short-term money markets [9]. In response, the FSA now places greater supervisory focus on liquidity risk especially with regard to "high-impact retail firms".[10]Northern Rock[9]FSA[10] Main article: Nationalisation of Northern Rock Nationalisation of Northern Rock

Operational Risk A risk arising from execution of a company's business functions; the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events.

Operational Risk Example The risks of electrical failures or employee fraud do not lend themselves as readily to modeling. Such risks are typically categorized under the rubric of "operational risk. ”

Market Risk The chance an investment portfolio decreases in value because of changes in market conditions.

The Five Standard Market Risk Factors Equity risk, or the risk that stock prices will change. Equity risk Interest rate risk, or the risk that interest rates will change. Interest rate risk Currency risk, or the risk that foreign exchange rates will change. Currency risk Commodity risk, or the risk that commodity prices (i.e. grains, metals, etc.) will change.Commodity risk Equity index risk, or the risk that stock or other index prices will change adversely.Equity index risk

Foreign Exchange Risk The risk of an investment's value changing due to changes in currency exchange rates.risk

Foreign Exchange Risk Example If an investor residing in the United States purchases a bond denominated in Japanese yen, a deterioration in the rate at which the yen exchanges for dollars will reduce the investor's rate of return, since he or she must exchange the yen for dollars. Also called exchange rate risk.

Credit Risk Also known as Default Risk The risk of loss of principal or loss of a financial reward stemming from a borrower's failure to repay a loan or otherwise meet a contractual obligation.

Credit Risk Examples ▪A consumer or a business does not make a payment due on a mortgage, credit card, line of credit, or other loan▪ A business does not pay an employee's earned wages when due▪wages A business or government bond issuer does not make a payment on a coupon or principal payment when due▪bondcoupon An insolvent insurance company does not pay a policy obligation▪insurance company An insolvent bank won't return funds to a depositor▪bank A government grants bankruptcy protection to an insolvent consumer or businessbankruptcyinsolvent

Interest RateInterest Rate Risk The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between two rates, in the shape of the yield curve or in any other interest rate relationship

Interest Rate Risk Example Longer maturity, fixed rate loans (for example, 30-year conventional mortgages) which are more sensitive to price risk from changes in rates than variable rate loans.