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:
“Capital as such is not evil; it is its wrong use that is evil. Capital in some form or other will always be needed.”
—Mohandas K. Gandhi (18691948)
“Every day, in this mostly male world, you have to figure out, Do I get this by charming somebody? By being strong? Or by totally allowing my aggression out? Youve got to risk failure. The minute you want to keep poweryouve become subservient, somebody who does work you dont believe in.”
—Paula Weinstein (b. 1945)