RISK MANAGEMENT IN

FINANCIAL INSTITUTIONS
 CREDIT RISK
CAUSE RISK
▸ arises because of the MANAGEMENT
possibility that promised ▸ Quantitative and
cash flows on financial qualitative credit analysis
claims held by FIs

2
 LIQUIDITY RISK
CAUSE RISK MANAGEMENT
▸ arises when depositors or ▸ Purchased liquidity
insurance policyholders, seek to management
cash in their financial claims
▸ Stored liquidity management
immediately
▸ ability to fund the exercise of off-
balance-sheet loan commitments.

3
 INTEREST RATE RISK
CAUSE RISK
▸ incurred by an FI when the MANAGEMENT
maturities of its assets and ▸ Evaluate Interest Rate
liabilities are mismatched
Risk using:
and interest rates are
volatile. ▹ Repricing Gap
▹ Duration Gap
4
 INSOLVENCY RISK
CAUSE RISK
▸ The risk that an FI may not MANAGEMENT
have enough capital to ▸ Improve cash flows
offset a sudden decline in
▸ Reduce Business
the value of its assets
Expenses
relative to its liabilities.
 OFF-BALANCE-SHEET RISK
CAUSE RISK
▸ incurred by an FI as the MANAGEMENT
result of activities related to ▸ Use Derivative Securities
contingent assets and ▹ Forwards Contracts
liabilities. ▹ Futures Contracts
▹ Options

6
 OFF-BALANCE-SHEET RISK
CAUSE RISK
▸ incurred by an FI as the MANAGEMENT
result of activities related to ▸ Sell and Securitize Loans
contingent assets and
liabilities.

7
 FOREIGN EXCHANGE RISK
▸ arises when exchange rate changes that can
adversely affect the value of an FI’s assets
and liabilities denominated in foreign
currencies.

8
MARKET RISK
▸ The risk incurred in trading assets and
liabilities due to changes in interest rates,
exchange rates, and other asset prices.
COUNTRY OR SOVEREIGN
RISK
▸ The risk that repayments from foreign
borrowers may be interrupted because of
interference from foreign governments.
TECHNOLOGY RISK
▸ occurs when technological investments do not
produce the anticipated cost savings in the
form of either economies of scale or
economies of scope.
OPERATIONAL RISK
▸ The risk that existing technology or support
systems may malfunction or break down.