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Types of Risks faced by a Bank

Published on Thursday, October 12, 2023
One of the most popular question in bank interviews is - What are the various kinds of risks faced by a bank ?

If you try to answer this in general terms, then this would make a negative impact in interviewers mind. So here are various types of risks faced by a bank

Market risk

Risk arises due to fluctuations in market price of marketable securities. Bank generally invests in equity shares, loss arises to bank due to fluctuations in equity market is known as market risk.

Interest rate risk

IRR arises due to fluctuation in the interest rate. If a bank had a lot of fixed deposits, fall in interest rate will cause loss to bank. Similarly, if a bank had a large amount of fixed interest rate loans, increase in interest rate will cause losses.

Foreign exchange risk

Banks may have large foreign exchange assets due to mismatch of the maturity date. Fluctuations in exchange rate cause loss to the bank.

Operational risk

Risks arise due to the failure of day to day activities, system or people. It includes both internal and external frauds like failures related to policies, laws, regulations, documentation or any technological risks.

Liquidity risk

Risks arise due to the inability of bank to meet its obligations and it refers to a situation when any asset may not be realized in cash. Also, we can say that it is a mismatch of assets and liabilities. It is a more important than any other risk because it has to be kept within limits, otherwise banks dependence on money market would increase.

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