BLOG

Types of Risks Looming in the Banking Industry

Mar 5, 2018

The banking industry is by far one of the largest industries in the world. In the US, insurance, real estate, and financial industry account for 20% of the total GDP. In order to keep the economy smoothly flowing, it is essential that the banking industry operates seamlessly. However, the truth is that the banking sector is far from stable, as banks face numerous risks that threaten not only their profits but also the economic balance as a whole. As a result, it is essential that banks perform proper risk analysis and mitigate such perils for smooth operations. Keeping risks unchecked can lead the world towards financial meltdown as witnessed in the 2008 global crisis. So what are the kind of risks faced by the banks that need to be regularly monitored?

With over 15 years of experience and a growing list of satisfied clientele that includes Fortune 500 companies and other leading brands, we’re confident that we can help you tackle your challenges. Request a proposal to collaborate with us.

Credit Risks

Credit risk can be defined as a risk that a borrower or the counterparty will fail to meet their obligations by agreed terms. Such risks occur due to borrowers’ inability to pay back loans arising out of interbank transactions, trade financing, foreign exchange transactions, swaps, bonds, financial futures, options, guarantees, and the settlement of transactions. To simplify the matter, a $100 borrowed and not paid back will result in banks taking the loss in full. Additionally, banks will have to redress the money from their lenders who can be the government, other banks, or the general public. Such losses in large amounts can cause a serious dent in the economy. The banking industry usually declares a high rate of interest for borrowers who are associated with high credit risk. Banks need to perform timely risk analysis at an individual level to protect its wealth.

Market Risks

“Mutual fund investments are subject to market risks.” You may have heard this statement a thousand times over in the banking industry. So what is market risk? It is the risk that causes losses in the bank’s trading books due to changes in interest rates, credit spreads, equity prices, foreign exchange rates, commodity prices, and other indicators. However, this type of risk only troubles players who are into the investment banking space since they are active in the capital markets. Market risks are hard to assess as some factors are highly volatile like commodity prices, whereas some are stable, but small deviations can cause big consequences like interest rates. Proper risk analysis can be carried out by dividing it as per their potential cause, i.e., interest rate risk, equity risk, currency risk, and commodity risk.


Gain limited-period complimentary access to our analytics platform and explore the business benefits of leveraging analytics in the banking sector.


Operational Risks

Losses that could arise from failed or inadequate internal processes, people, and systems or from external events is termed as operational risk. It also includes legal risk but does not incorporate strategic or reputation risk. Humans are prone to making errors and mistakes, and such errors can occur in the banking industry due to improper operational risk analysis. Filling incorrect information while clearing a financial instrument can cause loss of time to rectify that error and in some cases loss of money due to improper crediting of balance. Apart from human risk, operational risk can also occur due to system risk or process risk.

Liquidity Risks

Liquidity risk arises when banks perform inadequate risk analysis relating to the marketability of an investment that cannot be sold quickly enough to prevent a loss. In simple terms, it is a risk that disables a bank from carrying out its day-to-day cash transactions. Even though it may seem like a theoretical example, it happened in Northern England when one of the banks was taken over by the government due to its inability to repay the investors during the 2008 global crisis.

Business Risk

Businesses in the banking industry may be unable to meet its anticipated profit targets due to various reasons. Sometimes they may even incur a loss in place of making a profit. In the case of banks and the financial institutions, missing the target can have severe implications as banks will have to shuffle their investment and public money. Business risk arises due to the failure of the bank’s long-term strategy and errors in the estimation and forecasting of profit metrics. A proper business risk management strategy can ensure sustainability even in the harshest economic environment. Conducting thorough risk analysis by guaranteeing flexibility and adaptability to the market condition can help banks avoid business risk.

Ready to Harness Game-Changing Insights?

Request a free solution pilot to know how we can help you derive intelligent, actionable insights from complex, unstructured data with minimum effort to drive competitive readiness, market excellence, and success.

Recent Blogs

Emerging Applications of Artificial Intelligence in Medicine

Emerging Applications of Artificial Intelligence in Medicine

The main aim of artificial intelligence in medicine is to mimic human cognitive actions which is directly or indirectly bringing pioneer changes in the field of healthcare. Artificial intelligence in healthcare simplifies the processes of healthcare organizations as...

read more
HR Technology Trends Redefining the Modern-Day Workforce

HR Technology Trends Redefining the Modern-Day Workforce

In 2020, we witnessed rapid changes in workplace structures and business processes amid the pandemic outbreak. Advanced HR analytics solutions proved their potential amid the uncertainties by playing a crucial role in helping businesses understand and engage with a...

read more

Industries

Our advanced analytics expertise spans across industries, sectors, and functions, which enables us to deliver robust, agile solutions to all our clients. These are our core competencies, formed through years of experience.

Insights

Our free resources shed light on our extensive expertise and equip you with information to accelerate decision-making, growth, and innovation.