Risk in Banking Sector

Paper presentation On Risk in vernacularing firmament. Abstract The structure of the paper is three-fold, where we begin by what is luck in situateing scenario and its effectuate on internal operations of a bank, followed by the various types of risk in Indian banks and what can be done or the measurements taken and finally the future look. Introduction The Indian Financial System is tasting success of a decade of financial sector reforms. The prudence is surging and has self-collected the critical mass to convert it into a force to reckon with.The regulatory framework in India has sparked growth and key structural reforms have improved the plus quality and profitability of banks. Growing integration of economies and the food markets around the world is making global banking a reality. The RBI requires all banks to comply with the standardized approach of the BASEL II accord by 31st March, 2007. This paper attempts to project the implications of this transition and its effe cts on the internal operations of a bank followed by its effects on the banking industry and the economy.What is Risk? For the purpose of these guidelines financial risk in a banking organization is possibility that the outcome of an action or event could bring up adverse impacts. Such outcomes could either result in a direct loss of earnings / capital or may result in hypocrisy of constraints on banks ability to meet its business objectives Regardless of the sophistication of the measures, banks often distinguish between expected and unexpected losses.Expected losses atomic number 18 those that the bank knows with reasonable certainty provide occur (e. g. , the expected default rate of corporate loan portfolio or credit card portfolio) and ar typically reserved for in some manner. Unexpected losses atomic number 18 those associated with unforeseen events (e. g. Losses collectible to a sudden down turn in economy or falling interest rates). Types of risk in banks In the course of their operations, banks are invariably faced with different types of risks that may have a potentially negative effect on their business.The risks to which a bank is particularly exposed in its operations are liquidity risk, credit risk, market risks (interest rate risk, impertinent exchange risk and risk from change in market price of securities, financial derivatives and commodities), exposure risks, investment risks, risks relating to the country of origin of the entity to which a bank is exposed, in operation(p) risk, legal risk, reputational risk and strategic risk. Liquidity riskis the risk of negative effects on the financial result and capital of the bank caused by the banks inability to meet all its due obligations.Credit riskis the risk of negative effects on the financial result and capital of the bank caused by borrowers default on its obligations to the bank. Market riskincludes interest rate and foreign exchange risk. Interest rate riskis the risk of negative eff ects on the financial result and capital of the bank caused by changes in interest rates. Foreign exchange riskis the risk of negative effects on the financial result and capital of the bank caused by changes in exchange rates.A special type of market risk is therisk of change in the market priceof securities, financial derivatives or commodities traded or tradable in the market. Exposure risksinclude risks of banks exposure to a single entity or a crowd of related entities, and risks of banks exposure to a single entity related with the bank. Investment risksinclude risks of banks investments in entities that are not entities in the financial sector and in fixed assets.Operational riskis the risk of negative effects on the financial result and capital of the bank caused by omissions in the work of employees, pathetic internal procedures and processes, inadequate management of information and other systems, and unforeseeable external events. Legal riskis the risk of loss caused by penalties or sanctions originating from court disputes due to breach of contractual and legal obligations, and penalties and sanctions pronounced by a regulatory body.Reputational riskis the risk of loss caused by a negative impact on the market positioning of the bank. Strategic riskis the risk of loss caused by a lack of a long-term development component in the banks managing team. Risk management Risk Management is a discipline at the core of every financial institution and encompasses all the activities that affect its risk profile. In every financial institution, risk management activities broadly take place simultaneously at following different hierarchy aims. a) Strategic level It encompasses risk management functions performed by senior management and BOD. For instance definition of risks, formulating strategy and policies for managing risk etc b) Macro Level It encompasses risk management within a business area or across business lines. Generally the risk management activ ities performed by middle management. c) Micro Level It involves On-the-line risk management where risks are actually created.This is the risk management activities performed by individuals who take risk on organizations behalf such as front office and loan origination functions. Risk management in bank operations includes risk identification, measurement and assessment, and its objective is to minimize negative effects risks can have on the financial result and capital of a bank. Banks are therefore required to form a special organizational unit in charge of risk management. Also, they are required to prescribe procedures for risk identification, easurement and assessment, as well as procedures for risk management. The future Risk management activities leave alone be more pronounced in future banking because of liberalization, deregulation and global integration of financial markets. This would be adding depth and dimension to the banking risks. As the risks are correlated, expos ure to one risk may exceed to another risk, therefore management of risks in a proactive, efficient & integrated manner will be the strength of the successful banks ConclusionBy pickings measures the smaller banks would not have sufficient resources to withstand the intense competition of the sector. Banks would evolve to be a complete and pure financial services provider, give to all the financial needs of the economy. Flow of capital will increase and setting up of bases in foreign countries will become commonplace. Finally, the economy will stand to benefit as the banking sector develops. Savings will be mobilized in the right direction and the required funds needed for the countrys development will be made available.