From the course: The ABCs of the Banking and Insurance Business: AML, KYC, the NAIC, IFRS, and More
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Risk in banking
From the course: The ABCs of the Banking and Insurance Business: AML, KYC, the NAIC, IFRS, and More
Risk in banking
- [Instructor] Risk in banking refers to the potential for losses due to uncertain events. Every financial decision involves some degree of risk, but for banks, managing risk is especially important, since they safeguard customer funds and play a central role in the economy. Now, banks face several types of risks. Let's take a closer look at the most common ones. Let's start with credit risk. This is the risk that borrowers may fail to repay their loans. Managing credit risk involves assessing borrower reliability and diversifying the loan portfolio. Next, we have market risk. Market risk arises from fluctuations in financial markets, such as changes in interest rates and exchange rates, or even stock prices. For example, if interest rates rise unexpectedly, the value of a bank's loan portfolio may decrease. Then we have operational risk. These are risks from internal failures, like human error, systems breakdowns, or even fraud. Strong internal controls and robust systems can help…
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