Question

Describe two risks involved in banking, and explain how banks can protect against those risks.

Answer 1

Major risks faced by banks:

The major risks faced by banks include liquidity, market, operational, and credit risk.

Credit risks:

Credit risk is when the borrower does not repay the loan. The delayed payment of loans also comes under this category.

The bank generally conducts a back ground check and sanction loans to only those customers (business or individuals) who does not run out of income along the total period of loan. There are credit rating agencies that support the banks in assessing the creditworthiness of the borrower.

Operational Risks:

Operational risks refers to the operational failures of any banks day-to-day process. For example, payment to wrong accounts or external or internal fraud.

Banks now rely on technology-enabled risk surveillance. Using machine learning and advanced analytics, banks leverage tremendous trove of data to monitor bank’s entire operations automatically and continuously.