Risks facing by the Financial Institutions . Part-1

Different  types  of  risks  faced  by  a  financial  institution.

As  per  Central Bank  guideline  different  types  of  risks  faced  by  a  financial  institution  are:

1.  Residual  risks: 

Collaterals  can  pose  the  risks  like  legal  and  documentation risks.

2.  Credit  concentration  risk: 
Exposure  in  the  same  economic  or  geographic sector  and/or  in  dependent  industries

3.  Interest  rate  risk: 

It  in  banking  book  has  to  be  taken  into  account  as  a potential  risk.

-  Basis  risk.

-  Embedded  option  risk.

-  Gap  or  mismatch  risk.
-  Net  interest  position  risk.

4.  Liquidity  risk:  

-  Term  liquidity  risk.

-  Withdrawal/call  risk.

-  Structural  liquidity  risk . 

-  Market  liquidity  risk.

5.  Settlement  risk: 

It  arises  when  an  executed  transaction  is  not  settled 6.  Reputation  risk:  It  arise  due  to  lack  of  compliance, customer-friendly service, fair  market  practices, failure to deliver on  commitments,  high  costs, etc.

7.  Strategic  risk.

8.  Environmental  risk: 

The  uncertainty  or  probability  of  losses  that  originates from  any  adverse  environmental  or  climate  change  events

9. Other material risks.

What  do  you  mean  by  reputation  risk?  What  type  of  losses  may  be induced  in  a  bank  due  to  reputation  risk?

Reputation  risk  is  the  present or imminent circuitous danger to income and capital, decrease in the client base, immoderate suit emerging from antagonistic view of the banks' picture with respect to its partners. It may start from the absence of consistence with administration benchmarks, inability to convey on responsibilities, absence of client cordial administration and honest practices, preposterously high expenses, unseemly business conduct or unfavorable power sentiment and activities.


A few ways by which reputation  risk  can affect misfortunes for a firm / Bank: 

1.  Loss  of  current  or  future  customers,  for  example  increased  advertising  costs are  necessary  to  restrain  reputation  damage.

2.  Loss  of  employees  or  managers  within  bank,  an  increase  in  hiring  costs.

3.  Reduction  in  current  or  future  business  partners.

4.  Increased  costs  of  financial  funding .

5.  Increased  costs  due  to  govt.  policy,  supervisory  regulations  fines  or penalties.

Discuss  the  purpose  of  Market  Discipline  in  relation  with accounting  disclosures  under  revised  Regulatory  Capital  Framework for  banks  in  line  with  Basel-II.

The  purpose  of  market  discipline  in  the overhauled ampleness system is to supplement the base capital necessities and the supervisory audit handle that the point is to build up more straightforward and more trained money related market with the goal that partners can evaluate the position of a bank in regards to holding of benefits and to distinguish the dangers identifying with the advantages and capital sufficiency.

1.  It  is  expected  that  the  disclosure  framework  does  not  conflict  with requirement  under  accounting  standard  as  set  by  central bank.

2.  Under  minimum  capital  requirement, banks will utilize indicated methodologies/techniques for measuring the different dangers they confronted and the subsequent capital prerequisites.

3.  The  disclosures  ought to be liable to satisfactory acceptance, since data in the yearly money related explanations would for the most part be inspected and distributed.

What  are  the  components of  Tier-I  &  Tier-II  capital  according  to Basel Accord?

The  components  of  Tier-I  &  Tier-II  capital  according  to  BASEL  accord  are:

TIER-1  (core  capital):

1.  Paid  up  capital.

2.  Non  payable  share  premium  account. 

3.  Statutory  reserve.

4.  General  reserve.

5.  Retained  earning.

6.  Minority  interest  to  subsidiaries 

7.  Non  cumulative  irredeemable  preference  shares.

8. Dividend equalization account.

TIRE  2  (supplementary  capital):

1.  General  provision  (1%  of  CL)

2.  Assets  revaluation  reserves

3.  All  other  preference  shares

4. Exchange equalization a/c.

Risks facing by the Financial Institutions . Part-1

Risks facing by the Financial Institutions . Part-2

Risks facing by the Financial Institutions . Part-3

Risks facing by the Financial Institutions . Part-4