Bank risk means the inherent possibility (probability) of the credit institution suffering losses and (or) deterioration of liquidity due to adverse events related to internal factors (complexity of organizational structure, level of qualification of employees, organizational changes, turnover of employees, etc.) and (or) external factors (change of economic conditions of the credit institution, applied technologies, etc.).
Typical bank risks include:
Credit Risk means the risk of loss of the credit institution due to failure, late or incomplete performance by the debtor of financial obligations to the credit institution in accordance with the terms of the agreement.
These financial obligations may include the debtor 's obligations under:
- loans received, including interbank loans (deposits, loans), other funds offered, including claims for receipt (return) of debt securities, shares and promissory notes provided under the loan agreement;
- Notes posted by the credit institution;
- bank guarantees for which the funds paid by the credit institution have not been reimbursed by the principal;
- financial assignment financing transactions (factoring);
- acquired by the credit institution under the transaction (assignment of claim) rights (claims);
- mortgages purchased by a credit institution on the secondary market;
- sales (purchase) of deferred financial assets (delivery of financial assets);
- letters of credit paid by the credit institution (including uncoated letters of credit);
- return of funds (assets) under a transaction to acquire financial assets with the obligation of their reverse disposal;
- requirements of the credit institution (lessee) for transactions of financial lease (leasing).
The concentration of credit risk is reflected in the provision of large loans to an individual borrower or a group of related borrowers, as well as the ownership of debtors by a credit institution, either in separate sectors of the economy or in geographical regions, or in a number of other obligations that make them vulnerable to the same economic factors.
Credit risk increases when lending to persons associated with the credit institution (related lending), i.e. granting loans to individual natural or legal persons with real possibilities to influence the nature of decisions taken by the credit institution on the issue of loans and on the terms of lending, as well as to persons whose decision may be influenced by the credit institution.
When lending to related persons, credit risk may increase due to non-compliance or insufficient compliance with the rules, procedures and procedures established by the credit institution for considering applications for loans, determining the creditworthiness of the borrower (s) and making decisions on granting loans.
When lending foreign counterparties, the credit institution may also have a country risk and a risk of non-transfer of funds.
Country risk (including risk of non-transfer of funds) - risk of loss of the credit institution as a result of non-fulfillment of obligations by foreign counterparties (legal entities, individuals) due to economic, political, social changes, as well as because the currency of the monetary obligation may not be available to the counterparty due to the peculiarities of national legislation (regardless of the financial position of the counterparty itself).
Market risk means the risk of loss to the credit institution due to adverse changes in the market value of the trading portfolio financial instruments and derivatives of the credit institution, as well as the exchange rates of foreign currencies and/or precious metals.
Market risk includes stock risk, currency risk, and interest rate risk.
Stock risk means the risk of loss due to adverse changes in market prices of stock values (securities, including those securing rights to participate in management) of the trading portfolio and derivative financial instruments under the influence of factors related both to the issuer of stock values and derivative financial instruments and to general fluctuations in market prices of financial instruments.
Currency risk means the risk of loss due to adverse changes in the exchange rates of foreign currencies and/or precious metals at positions open by the credit institution in foreign currencies and/or precious metals.
Percentage risk - risk of emergence of financial losses (losses) owing to adverse change of interest rates for assets, liabilities and off-balance tools of credit institution.
The main sources of interest rate risk may be:
- The maturity of assets, liabilities and off-balance sheet claims and obligations of fixed-rate instruments;
- The maturity of assets, liabilities and off-balance sheet claims and obligations of variable interest rate instruments (interest rate risk);
- Changes in the configuration of the long and short yield curve on financial instruments of one issuer, creating a risk of loss as a result of exceeding potential costs over revenues when closing these positions (yield curve risk);
- for financial instruments with a fixed interest rate provided their maturity matches - the degree of change of interest rates on resources attracted and placed by the credit institution does not match; For floating interest rate financial instruments, provided that the rate of revision of the floating interest rate is the same, the degree of change in interest rates does not match (base risk);
- Extensive use of option transactions with traditional interest rate-sensitive instruments (bonds, loans, mortgages and securities, etc.) that create a risk of loss as a result of a waiver by one of the parties to the transaction (option risk).
Liquidity risk means the risk of loss due to the inability of the credit institution to ensure full performance of its obligations.
Liquidity risk arises as a result of imbalance of financial assets and financial obligations of the credit institution (including due to late fulfillment of financial obligations by one or more counterparties of the credit institution) and (or) unforeseen necessity of immediate and one-time fulfillment of financial obligations by the credit institution.
Operational Risk - Risk of loss as a result of non-compliance with the nature and scope of activities of the credit institution and (Or) the requirements of the current legislation of internal procedures and procedures for carrying out banking transactions and other transactions, their violation by employees of the credit institution and (Or) other persons (due to incompetence, unintentional or intentional acts or omissions), Disproportionate (insufficient) functional capabilities (characteristics) of information, technological and other systems used by the credit institution; (Or) their failures (malfunctions), as well as a result of external events.
Legal Risk - credit institution risk of loss due to:
- non-compliance of the credit institution with the requirements of normative legal acts and concluded contracts;
- legal errors in the conduct of activities (incorrect legal advice or incorrect drafting of documents, including in the consideration of disputes before the judiciary);
- imperfections of the legal system (contradictions of legislation, absence of legal norms to regulate certain issues arising in the process of activity of the credit institution);
- violations by counterparties of normative legal acts, as well as the terms of concluded contracts.
Risk of loss of business reputation of the credit institution (reputational risk) - risk of losses of the credit institution as a result of reduction of the number of clients (counterparties) due to formation of negative perception in the society of financial stability of the credit institution, quality of services provided by it or nature of activity in general.
Strategic Risk - Risk to credit institution due to errors (Shortcomings) made in making decisions determining the strategy of activity and development of the credit institution (Strategic management), and expressed in failure to take into account or insufficient consideration of possible dangers that may threaten the activity of the credit institution, incorrect or insufficiently justified determination of promising directions of activity in which the credit institution can achieve advantage over competitors, absence or provision of incomplete amount of necessary resources (Financial, logistical, human) and organizational measures (management decisions) to ensure the achievement of the strategic objectives of the credit institution.