"Commercial Banking and Finance"

Essay by SyncopeHigh School, 12th gradeB, November 2002

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Its about the risks a bank has and each one of them is described in some detail. Rather useful, done with the help of the Commercial Banking book. Thank you

Commercial Banking and Finance

Assessment One

Banks exist to make profits to their shareholders, and a lot of the time, that it exactly what happens. Its not all smooth sailing though, banks are often exposed to various risks while attempting to generate profits. Some of these risks are as follows;

I. Credit Risk

Credit risk can be defined as a delay in receiving payments arising from solvency. To estimate the amount of credit risk a bank has they have to either consider what type of assets the bank might have and also what sort of exposure their personal clients and related industries have toward its financial system. Some bank managements limit these exposures to a certain percentage of the banks capital base.

II. Investment Risk or Market Risk

Investment Risk (or Market Risk) is basically the loss which forms as a result from a drop in value among the investment shares. It often relates to any mismatch position the bank could contain, whether that be interest rate and/or foreign exchange. So when the banks mismatch the interest rate or foreign exchange position, they make a loss in capital or revenue.

III. Liquidity Risk

This can be defined as a loss arising from the need to pay penalty interest rates on short term deposits or incurring penalty costs on asset sales to meet the short term liquidity problems. This is a well known problem among the banks management and it is dealt on a day to day basis. The banks have tried to lower this risk by more effective management of they monetary policy.

IV. Operating Risk

This is in short,