Bank - Risk and Capital

Risk and Capital

Banks face a number of risks in order to conduct their business, and how well these risks are managed and understood is a key driver behind profitability, and how much capital a bank is required to hold. Some of the main risks faced by banks include:

  • Credit risk: risk of loss arising from a borrower who does not make payments as promised.
  • Liquidity risk: risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss (or make the required profit).
  • Market risk: risk that the value of a portfolio, either an investment portfolio or a trading portfolio, will decrease due to the change in value of the market risk factors.
  • Operational risk: risk arising from execution of a company's business functions.
  • Reputational risk: a type of risk related to the trustworthiness of business.
  • Macroeconomic risk: risks related to the aggregate economy the bank is operating in.

The capital requirement is a bank regulation, which sets a framework on how banks and depository institutions must handle their capital. The categorization of assets and capital is highly standardized so that it can be risk weighted (see risk-weighted asset).

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Famous quotes containing the words capital and/or risk:

    A good many have been thrown out on their broad capital bases.
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