Eco. 324 —23-4-2021 (Online Discussion Quiz 3—Risks of Commercial Banks)

Name: Oroke Charity N
Reg no:2017/243816
Course :Eco 324
Department: Economics

Risk of commercial Banks
Commercial Banks face allot of risk, and they include the following :
Credit Risk
Credit risk is the biggest risk for banks. It occurs when borrowers or counterparties fail to meet contractual obligations. An example is when borrowers default on a principal or interest payment of a loan. Defaults can occur on mortgages, credit cards, and fixed income securities. Failure to meet obligational contracts can also occur in areas such as derivatives and guarantees provided.
While banks cannot be fully protected from credit risk due to the nature of their business model, they can lower their exposure in several ways. Since deterioration in an industry or issuer is often unpredictable, banks lower their exposure through diversification.
By doing so, during a credit downturn, banks are less likely to be overexposed to a category with large losses. To lower their risk exposure, they can loan money to people with good credit histories, transact with high-quality counterparties, or own collateral to back up the loans.

Operational Risk
Operational risk is the risk of loss due to errors, interruptions, or damages caused by people, systems, or processes. The operational type of risk is low for simple business operations such as retail banking and asset management, and higher for operations such as sales and trading. Losses that occur due to human error include internal fraud or mistakes made during transactions. An example is when a teller accidentally gives an extra $50 bill to a customer.
On a larger scale, fraud can occur through the breaching a bank’s cybersecurity. It allows hackers to steal customer information and money from the bank, and blackmail the institutions for additional money. In such a situation, banks lose capital and trust from customers. Damage to the bank’s reputation can make it more difficult to attract deposits or business in the future.
Market Risk
Market risk mostly occurs from a bank’s activities in capital markets. It is due to the unpredictability of equity markets, commodity prices, interest rates, and credit spreads. Banks are more exposed if they are heavily involved in investing in capital markets or sales and trading.
Commodity prices also play a role because a bank may be invested in companies that produce commodities. As the value of the commodity changes, so does the value of the company and the value of the investment. Changes in commodity prices are caused by supply and demand shifts that are often hard to predict. So, to decrease market risk, diversification of investments is important. Other ways banks reduce their investment include hedging their investments with other, inversely related investments.

Liquidity Risk
Liquidity risk refers to the ability of a bank to access cash to meet funding obligations. Obligations include allowing customers to take out their deposits. The inability to provide cash in a timely manner to customers can result in a snowball effect. If a bank delays providing cash for a few of their customer for a day, other depositors may rush to take out their deposits as they lose confidence in the bank. This further lowers the bank’s ability to provide funds and leads to a bank run.
Reasons that banks face liquidity problems include over-reliance on short-term sources of funds, having a balance sheet concentrated in illiquid assets, and loss of confidence in the bank on the part of customers. Mismanagement of asset-liability duration can also cause funding difficulties. This occurs when a bank has many short term liabilities and not enough short-term assets.
Short-term liabilities are customer deposits or short-term guaranteed investment contracts (GICs) that the bank needs to pay out to customers. If all or most of a bank’s assets are tied up in long-term loans or investments, the bank may face a mismatch in asset-liability duration.
Regulations exist to lessen liquidity problems. They include a requirement for banks to hold enough liquid assets to survive for a period of time even without the inflow of outside funds.
Interest Rate Risk
Interest rate risk is one of the more prevalent risks for commercial banks. Generally, commercial banks are proficient at mitigating interest rate risk in their investment portfolios. However, interest rates are outside the domain of commercial bank operations. Instead, the Federal Reserve, the central bank of the U.S., exercises considerable influence over interest rates. As a result, commercial banks try to hedge their loans against any changes in the general interest rate level in the economy.
Default Risk
Commercial banks generally make most of their money on loans. Although banks screen borrowers and analyze their financial position and ability to pay, commercial banks are still susceptible to borrower default. When borrowers are unable to pay, they default on a loan, causing the bank to lose money. Although a general analysis of a bank’s loan portfolio will indicate a small margin of default, widespread borrower default may jeopardize the solvency of a commercial bank.
Regulation risk
Commercial banks are also subject to regulation. Depending on the type of bank, specialization and state in which they operate, commercial banks work within a framework of legal regulation. When regulations change, the bank’s operational framework changes, which may impact its ability to generate profits from loans. For example, the Federal Reserve may increase the amount of required reserves, forcing commercial banks to withhold more money to cover customer withdrawals. This decreases the amount of bank capital available to lend, which may reduce bank profits.

by

Name: Ani, Gabriel Ogbonna
Reg. Number: 2017/249483
Email: anigabriel05@gmail.com

Commercial banks are faced with diverse risk, both internal and external. This risk mostly occur as result of large size of banks, nature of business and overexposure to risk which can cause bank failure and impact millions of people. The ability of a bank to manage risk also affects investors’ decisions. Even if a bank can generate large revenues, lack of risk management can lower profits due to losses on loans. Value investors are more likely to invest in a bank that is able to provide profits and is not at an excessive risk of losing money. No commercial bank can avert risk but the proper management of this risk will make them to remain in business.
Some of the risk that commercial banks face and it’s management are as follows;
CREDIT RISK
Credit risk is the biggest risk for banks. It occurs when borrowers or counterparties fail to meet contractual obligations. An example is when borrowers default on a principal or interest payment of a loan. Defaults can occur on mortgages, credit cards, and fixed income securities. Failure to meet obligational contracts can also occur in areas such as derivatives and guarantees provided.
While banks cannot be fully protected from credit risk due to the nature of their business model, they can lower their exposure in several ways. Since deterioration in an industry or issuer is often unpredictable, banks lower their exposure through diversification.
By doing so, during a credit downturn, banks are less likely to be overexposed to a category with large losses. To manage their risk exposure, they can loan money to people with good credit histories, transact with high-quality counterparties, or own collateral to back up the loans.

LIQUIDITY RISK
Liquidity risk refers to the ability of a bank to access cash to meet funding obligations. Obligations include allowing customers to take out their deposits. The inability to provide cash in a timely manner to customers can result in a snowball effect. If a bank delays providing cash for a few of their customer for a day, other depositors may rush to take out their deposits as they lose confidence in the bank. This further lowers the bank’s ability to provide funds and leads to a bank run.
Reasons that banks face liquidity problems include over-reliance on short-term sources of funds, having a balance sheet concentrated in illiquid assets, and loss of confidence in the bank on the part of customers. Mismanagement of asset-liability duration can also cause funding difficulties. This occurs when a bank has many short term liabilities and not enough short-term assets.
Short-term liabilities are customer deposits or short-term guaranteed investment contracts (GICs) that the bank needs to pay out to customers. If all or most of a bank’s assets are tied up in long-term loans or investments, the bank may face a mismatch in asset-liability duration.
Regulations exist to lessen liquidity problems. They include a requirement for banks to hold enough liquid assets to survive for a period of time even without the inflow of outside funds.

OPERATIONAL RISK
Operational risk is the risk of loss due to errors, interruptions, or damages caused by people, systems, or processes. The operational type of risk is low for simple business operations such as retail banking and asset management, and higher for operations such as sales and trading. Losses that occur due to human error include internal fraud or mistakes made during transactions. An example is when a teller accidentally gives an extra #50 bill to a customer. On a larger scale, fraud can occur through the breaching a bank’s cybersecurity. It allows hackers to steal customer information and money from the bank, and blackmail the institutions for additional money. In such a situation, banks lose capital and trust from customers. Damage to the bank’s reputation can make it more difficult to attract deposits or business in the future.

MARKET RISK
Market risk mostly occurs from a bank’s activities in capital markets. It is due to the unpredictability of equity markets, commodity prices, interest rates, and credit spreads. Banks are more exposed if they are heavily involved in investing in capital markets or sales and trading. Commodity prices also play a role because a bank may be invested in companies that produce commodities. As the value of the commodity changes, so does the value of the company and the value of the investment. Changes in commodity prices are caused by supply and demand shifts that are often hard to predict. So, to decrease market risk, diversification of investments is important. Other ways banks reduce their investment include hedging their investments with other, inversely related investments

Name: ABIAZIA RUFUS CHIDIEBUBE
REG. No: 2017/243371
DEPT: Economics
Level: 300

Commercial Bank risk is both internal and external. The major risks faced by banks include credit, operational, market, and liquidity risk.
Due to the large size of some banks, overexposure to risk can cause bank failure and impact millions of people. By understanding the risks posed to banks, governments can set better regulations to encourage prudent management and decision-making. The ability of a bank to manage risk also affects investors’ decisions. Even if a bank can generate large revenues, lack of risk management can lower profits due to losses on loans. Value investors are more likely to invest in a bank that is able to provide profits and is not at an excessive risk of losing money.

Credit Risk

Credit risk is the biggest risk for banks. It occurs when borrowers or counterparties fail to meet contractual obligations. An example is when borrowers default on a principal or interest payment of a loan.
Major Risks for Banks
Credit, operational, market, and liquidity risks
Prudent risk management can help banks improve profits as they sustain fewer losses on loans and investments.
Ways to decrease risks include diversifying assets, using prudent practices when underwriting, and improving operating systems.

Credit Risk

Credit risk is the biggest risk for banks. It occurs when borrowers or counterparties fail to meet contractual obligations. An example is when borrowers default on a principal or interest payment of a loan. Defaults can occur on mortgages, credit cards, and fixed income securities. Failure to meet obligational contracts can also occur in areas such as derivatives and guarantees provided.

While banks cannot be fully protected from credit risk due to the nature of their business model, they can lower their exposure in several ways. Since deterioration in an industry or issuer is often unpredictable, banks lower their exposure through diversification.

By doing so, during a credit downturn, banks are less likely to be overexposed to a category with large losses. To lower their risk exposure, they can loan money to people with good credit histories, transact with high-quality counterparties, or own collateral to back up the loans.

Operational Risk

Operational risk is the risk of loss due to errors, interruptions, or damages caused by people, systems, or processes. The operational type of risk is low for simple business operations such as retail banking and asset management, and higher for operations such as sales and trading.

Market Risk

Market risk mostly occurs from a bank’s activities in capital markets. It is due to the unpredictability of equity markets, commodity prices, interest rates, and credit spreads. Banks are more exposed if they are heavily involved in investing in capital markets or sales and trading. Other ways banks reduce their investment include hedging their investments with other, inversely related investments.

Liquidity Risk

Liquidity risk refers to the ability of a bank to access cash to meet funding obligations. Obligations include allowing customers to take out their deposits. The inability to provide cash in a timely manner to customers can result in a snowball effect. Regulations exist to lessen liquidity problems. They include a requirement for banks to hold enough liquid assets to survive for a period of time even without the inflow of outside funds.

Ways to decrease risks include diversifying assets, using prudent practices when underwriting, and improving operating systems.

NAME:OKEKE NANCY OGADIMMA
REG NO:2017/249557
DEPARTMENT:ECONOMICS
EMAIL:ogadimmanancy@gmail.com

Commercial banks are typically known to face some risks in the course of their business operations. Some of these risks are internal while others are external.
Due to the large size of commercial banks ,overexposure to risk can cause bank failure. The major risks faced by banks include credit risk, operational risk, market risk, and liquidity risk.
Credit risk is the biggest risk for banks. It occurs when borrowers or counterparts fail to meet contractual obligations. For example, when borrowers default on a principal or interest payment of a loan. Failure to meet contracts can also occur in areas such as derivatives and guarantees provided.
Operational risk can be defined as the risk of loss due to errors ,interruptions ,or damages caused by people, systems ,or processes. This operational type pf risk is low for simple business operations such as retail banking and asset management, and higher for operations such as sales and trading.
Also losses that occur due to human error like internet fraud or mistakes made during transactions. Fraud usually occur through the breaching of a bank’s cyber security. It allows hackers to steal customer information and money from the bank, and blackmail the institutions for additional money. In such a situation, the banks lose capital and trust from the customers and this therefore can damage a bank’s reputation and thereby making it difficult to attract deposits or business in the future.
Market risk
Mostly occurs from a bank’s activities in capital markets. It is due to the unpredictability of equity markets, commodity prices, interest rates. Banks are more exposed if they are heavily involved in investing in capital markets or sales and trading.
Commodity prices also play a role because a bank may be invested in companies that produce commodities. AAs the value of the commodity changes , so does the value of the company and the value of the investment. These changes are caused by supply and demand shifts that are often hard to predict.
Liquidity risk refers to the ability of a bank to access cash to meet funding obligations. Obligations include allowing customers to take out their deposits. The inability to provide cash in a timely manner to customers can result in bounce back effect equally known as snow ball effect. If a bank delays providing cash for a few of their customers for a day, other depositors may rush out to take out their money/deposits as they lose confidence in the bank. This further lowers the bank’s ability to provide funds and leads to a bank run.
Banks face liquidity problems due to over-reliance on short-term sources of funds, having a balance sheet concentrated in illiquid assets, and loss of confidence in the bank on the part of customers. Mismanagement of asset-liability duration can also cause funding difficulties .this occurs when a bank has many short term liabilities and not enough short-term assets.
WAYS TO MINIMIZE ADVERSE EFFECTS OF THESE RISKS
Banks can lower the exposure of risks through diversification. By doing so, during a credit downturn, banks are less likely to be overexposed to a category with large losses. To lower their risk exposure ,they can loan money to people with good credit histories, transact with high-quality counterparts, or own collateral to back up the loans.
Also diversification of investments and hedging their investment with other inversely related investments can also help to lower the exposure of risks..
Regulations also exist to lessen liquidity problems. They include a requirement for banks to hold enough liquid assets to survive for a period of time even without the infloe of outside funds.
By understanding the risks posed to banks ,governments can set better regulations to encourage prudent management and decision-making.

Osuiwu Adimchinobi Peace
2017/249570
Economics department

Some of the risks of commercial banks include credit risk, market risk, strategic risk, liquidity risk, reputational risk and business risk.
To deal with this, commercial banks do the following:
1. Diversify their investments.
2. Employ qualified workers for the right job.
3. Thorough background check on potential borrowers.
4. Give advice on investments to be made with loans and supervise projects carried out with the loans.
5. Diversify the types of loans given based on their duration.
6. Never participate in any unfair or manipulative business practices.
7. Continuously ensure that their public relations efforts project them as a friendly and honest bank.
8. Do not depend on short-term sources of funds and concentrate highly on illiquid assets.

Name: Ugorji Ijeoma Judith

Reg no: 2017/243088

Department: ECONOMICS

Risk refers to a possible event that could cause harm or loss. It is the possibility of something bad happening. In terms of business or finance, risk involves the uncertainty about the effect or implications of the outcome of a financial or business activity. Such activities could be investment, savings, starting up a business and even lending money to another to start a business. All these are financial activities involving risk.
Every human and non human entity is faced with uncertainty about the outcome of their day to day activities. No one is certain about the exact outcome of their daily involvement even though they may be aware of the possible outcomes which could be either positive or negative. Either way, risk is one inevitable phenomenon people face on daily basis.
Therefore, just like other entities, the commercial bank is a financial institution faced with a number of risk associated with day to day financial activities. Some of these risk are products of certain internal factors while some are posed by the effect of the macroeconomic environment in which the business operates in. These risk are discussed below.
VOLATILITY RISK: market flunctuations can be unnerving to investors. Stock prices of some companies may flunctuate up and down causing some potential investors not to invest in such stock. These flunctuations may be as a result of faulty products or political or market events.
INFLATION RISK: inflation is a general rise in prices level. It reduces purchasing power, which is a risk for investors receiving fixed rate of interest.
INTEREST RATE RISK: interest rate changes affects bond’s value. Rising interest rates will make newly issued bond more appealing to investors cause the newer bonds will have a higher rate of interest than older ones.
LIQUIDITY RISK: this refers to the risk that investors will not find a market for their securities potentially preventing them from buying or selling when they want.
CREDIT RISK: this is a fundamental risk faced by commercial banks . This is risk associated with giving out loans to businesses. When this loans are not paid as at when due, it affects the credit available to banks. This in turn affects credit creation function of the bank.
OPERATIONAL RISK: this is a major internal risk which arises on daily basis. This could be risk associated with daily transactions, attending to customers.
REPUTATIONAL RISK: this risk poses a threat to the reputation of the business. A major driving force of every business is goodwill and integrity. No bank wants to be found wanting in this regard.
Other risks faced by commercial banks include strategic risk, exchange rate risk, legal and compliance risk, concentration risk, solvency risk. Etc.
These risks however can be mitigated and the adverse effect can be minimized if banks can build up risk management strategies such as training their staff rigorously on risk management, proper and up to date records of every business transactions, regular monitoring and assessment of managerial activities, zero tolerance for incompetencies on the part of members of staff, transparent and accountable credit lending processes and other measures should be put in place to reduce or avert risk.

Udeh Rita Ezinne
2017/249578
ritaudeh563@gmail.com
Commercial Bank are typically known to face some risk in their day to day business operations. I agree that some of these risk are internal while some are external.
Some of the internal risk faced by commercial Banks include Strategic Risk, Reputation Risk, Credit Risk, etc, while some of the external risks which are not many include: Funding and Liquidity Risk, Market Risk, Other operational Risk, etc.
Credit Risk
Credit risk is the biggest risk for banks. It occurs when borrowers or counterparties fail to meet contractual obligations. An example is when borrowers default on a principal or interest payment of a loan. Defaults can occur on mortgages, credit cards, and fixed income securities. Failure to meet obligational contracts can also occur in areas such as derivatives and guarantees provided.
While banks cannot be fully protected from credit risk due to the nature of their business model, they can lower their exposure in several ways. Since deterioration in an industry or issuer is often unpredictable, banks lower their exposure through diversification.
By doing so, during a credit downturn, banks are less likely to be overexposed to a category with large losses. To lower their risk exposure, they can loan money to people with good credit histories, transact with high-quality counterparties, or own collateral to back up the loans.
Strategic Risk
Risks like the Strategic Risk which is internal has to do with how well the bank carry out there duties that is, the strategies, plans, policies they employ to carry out their functions. If these plans and strategies that the bank in question employs is not working fine or not yielding good and expected results, there is a need to cross-check where the bank has gone wrong as customers might not even be patronizing the bank which would lead to the risk of solvency which is how much the bank has to keep itself in business as well as discharge her duties properly and effectively.
Operational Risk
Operational risk is the risk of loss due to errors, interruptions, or damages caused by people, systems, or processes. The operational type of risk is low for simple business operations such as retail banking and asset management, and higher for operations such as sales and trading. Losses that occur due to human error include internal fraud or mistakes made during transactions. An example is when a teller accidentally gives an extra $50 bill to a customer.
On a larger scale, fraud can occur through the breaching a bank’s cybersecurity. It allows hackers to steal customer information and money from the bank, and blackmail the institutions for additional money. In such a situation, banks lose capital and trust from customers. Damage to the bank’s reputation can make it more difficult to attract deposits or business in the future.
Market Risk
Market risk mostly occurs from a bank’s activities in capital markets. It is due to the unpredictability of equity markets, commodity prices, interest rates, and credit spreads. Banks are more exposed if they are heavily involved in investing in capital markets or sales and trading.
Commodity prices also play a role because a bank may be invested in companies that produce commodities. As the value of the commodity changes, so does the value of the company and the value of the investment. Changes in commodity prices are caused by supply and demand shifts that are often hard to predict. So, to decrease market risk, diversification of investments is important. Other ways banks reduce their investment include hedging their investments with other, inversely related investments.
Liquidity Risk
Liquidity risk refers to the ability of a bank to access cash to meet funding obligations. Obligations include allowing customers to take out their deposits. The inability to provide cash in a timely manner to customers can result in a snowball effect. If a bank delays providing cash for a few of their customer for a day, other depositors may rush to take out their deposits as they lose confidence in the bank. This further lowers the bank’s ability to provide funds and leads to a bank run.
Reasons that banks face liquidity problems include over-reliance on short-term sources of funds, having a balance sheet concentrated in illiquid assets, and loss of confidence in the bank on the part of customers. Mismanagement of asset-liability duration can also cause funding difficulties. This occurs when a bank has many short term liabilities and not enough short-term assets.
Short-term liabilities are customer deposits or short-term guaranteed investment contracts (GICs) that the bank needs to pay out to customers. If all or most of a bank’s assets are tied up in long-term loans or investments, the bank may face a mismatch in asset-liability duration.
Regulations exist to lessen liquidity problems. They include a requirement for banks to hold enough liquid assets to survive for a period of time even without the inflow of outside funds.

NAME:OZUEM DEBORAH OGHENEKEVWE
REG NO: 2017/249572
DEPT: ECONOMICS
EMAIL: deborah.ozuem.249572@unn.edu.ng

Truly, every commercial bank face risks both internal and external. How these risks are managed will determine if they will make profits or losses. These risks include:
1. Credit risk: This type of risk is associated with loans and credit given to debtors. When debtors default in their payment, banks may run loss of bad debt.
2. Liquidity risk: This is a type of risk that occurs when banks are not able to meet up with the cash required to fund obligations. For instance, a customer who wants to withdraw but is unable to do so due to lack of ready cash in the bank.
3. Market risk: Market risk is associated with a fall in the value of assets in a portfolio due to a change in the value of market risk factors.
4. Operational risk: This type of risk arises as a result of the day-to-day running, organization and operation of the bank. In the process of carrying out some functions, a bank may incur operational risk such as embezzlement, fire outbreak, etc.
5. Macroeconomic risk: Here, the aggregate economy which the bank finds itself could pose as a risk to the bank e.g, in an economy with severe insecurity issues, the bank may not be able to carry out its activities effectively due to the unconducive environment in the country.
6. Reputational risk: These are risks associated with the image and goodwill of the bank. For instance, an awful experience with a customer service attendant could cause the bank to loose a good amount of their customers.
CONCLUSION:
The above risk all reduce profitability of a bank if not properly managed and sometimes may not be predictable as with credit risk. Some of the possible suggestions to minimize the adverse effects of these risks include:
1. Diversification of investment and loan packages
2. Hedging
3. Avoid heavy investment in illiquid assets.

NAME: OKONKWO FAITH MUNACHI
REG NO: 2017/242422
E-MAIL:faith.okonkwo.242422

ANSWER
The very nature of banking system therefore makes them prone to risks. Thus, the management of banks requires a lot of skill since multiple types of risks need to be mitigated. Some of these risks can be avoided whereas for the others the best that banks can do is to minimize their damage. Banks are faced with risks, both internal and external risks. Below are some of the risks and ways to mitigate or minimize them.
RISKS FACED BY BANKS
It is often said that profit is a reward for risk bearing. Nowhere is this truer than in the case of banking industry. Banks are literally exposed to many different types of risks. A successful banker is one that can mitigate these risks and create significant returns for the shareholders on a consistent basis. Mitigation of risks begins by first correctly identifying the risks, why they arise and what damage can they cause. In this article, we have listed the major types of risks that are faced by every bank. They are as follows:

Credit Risks
Credit risk is the risk that arises from the possibility of non-payment of loans by the borrowers. Although credit risk is largely defined as risk of not receiving payments, banks also include the risk of delayed payments within this category.
Often times these cash flow risks are caused by the borrower becoming insolvent. Hence, such risk can be avoided if the bank conducts a thorough check and sanctions loans only to individuals and businesses that are not likely to run out of income over the period of the loan. Credit rating agencies provide adequate information to enable the banks to make informed decisions in this regard. The moment a loan is made, a certain amount of money is appropriated to the provision account. Also, banks have started utilizing tools like structured finance to mitigate such risks. Securitization helps remove the concentrated risk from the bank’s books and diffuse it amongst the various investors in the capital markets. Credit derivatives like credit default swap have also come into existence to help banks survive in the event of a credit default.
Unpaid loans were, are and will always be a byproduct of conducting the banking business. Modern banks have realized this and are prepared to handle the situation without becoming insolvent until a catastrophic loss occurs.

Market Risks
Apart from making loans, banks also hold a significant portion of securities. Some of these securities are held because of the treasury operations of the bank i.e. as a means to park money for the short term. However, many securities are also held as collateral based on which banks have given loans to their customers. The business of banking is therefore intertwined with the business of capital markets.
Banks face market risks in various forms. For instance if they are holding a large amount of equity then they are exposed to equity risk. Also, banks by definition have to hold foreign exchange exposing them to Forex risks. Similarly banks lend against commodities like gold, silver and real estate which exposes them to commodity risks as well.
In order to be able to mitigate such risks banks simply use hedging contracts. They use financial derivatives which are freely available for sale in any financial market. Using contracts like forwards, options and swaps, banks are able to almost eliminate market risks from their balance sheet.

Operational Risks
Banks have to conduct massive operations in order to be profitable. Economies of scale work in the favor of larger banks. Hence, maintaining consistent internal processes on such a large scale is an extremely difficult task.
Operational risk occurs as the result of a failed business processes in the bank’s day to day activities. Examples of operational risk would include payments credited to the wrong account or executing an incorrect order while dealing in the markets. None of the departments in a bank are immune from operational risks.
Operational risks arise mainly because of hiring the wrong people or alternatively they could also occur if there is a breakdown of the information technology systems. A lapse in the internal processes being followed could also lead to catastrophic errors.
The banks are required to devise their own norms and procedures to identify the areas of operational risk and controlling thereof.

Liquidity Risk
Liquidity risk is another kind of risk that is inherent in the banking business. Liquidity risk is the risk that the bank will not be able to meet its obligations if the depositors come in to withdraw their money. This risk is inherent in the fractional reserve banking system. Therefore, in this system, only a percentage of the deposits received are held back as reserves, the rest are used to create loans. Therefore, if all the depositors of the institution came in to withdraw their money all at once, the bank would not have enough money. This situation is called a bank run. This has happened countless times over the history of modern banking.
Modern day banks are not very concerned about liquidity risk. This is because they have the backing of the central bank. In case there is a run on a particular bank, the central bank diverts all its resources to the affected bank. Therefore, the depositors can be paid back when they demand their deposits. This restores depositor’s confidence in the banks finances and the run on the bank is averted.

Reputational Risk
Reputation is an extremely important intangible asset in the banking business. Banks like JP Morgan bank, Chase bank, Citibank, Bank of America etc have all been in the business for hundreds of years and have stellar reputations. These reputations enable them to generate more business more profitably.
Customers like their money to be deposited at places which they believe follow safe and sound business practices. Hence, if there is any news in the media which projects a given bank in a negative light, such news negatively impacts the banks business.
Banks can save their reputation by ensuring that they never participate in any unfair or manipulative business practices. Also, banks need to continuously ensure that their public relations efforts project them as a friendly and honest bank.

Systemic Risk
Systemic risk arises because of the fact that the financial system is one intricate and connected network. Hence, the failure of one bank has the possibility to cause the failure of many other banks as well. This is because banks are counterparties to each other in a lot of transactions. Hence, if one bank fails, the credit risk event for the other banks becomes a reality.
They have to write off certain assets as a result of the failure of their counterparty. This writing off often leads to the bankruptcy of other banks and an unstoppable domino seems to take over. Systemic risk is an extremely bad scenario to be in.Market Risk
Market risk mostly occurs from a bank’s activities in capital markets. It is due to the unpredictability of equity markets, commodity prices, interest rates, and credit spreads. Banks are more exposed if they are heavily involved in investing in capital markets or sales and trading.
Commodity prices also play a role because a bank may be invested in companies that produce commodities. As the value of the commodity changes, so does the value of the company and the value of the investment. Changes in commodity prices are caused by supply and demand shifts that are often hard to predict. So, to decrease market risk, diversification of investments is important. Other ways banks reduce their investment include hedging their investments with other, inversely related investments.

Business Strategy and Environment Risk
This risk arises on account of inappropriate or non-viable business strategy adopted by the banks; its total absence and the business environment that the bank operates in, including business cycle that the economy may be passing through. This risk can be mitigated by proper planning for identification of target areas, markets, products, customer base, etc. Lack of such a planning may pose a significant risk to the earnings and viability of a bank.

Legal Risk
Legal Risk arises from the potential that unenforceable contracts, lawsuits, or adverse judgments can disrupt or otherwise negatively affect the operations or condition of the branch.

Compliance Risk
Compliance risk arises due to non-compliance of statutory requirements, prudential norms and supervisory (Reserve Bank of India) directives/guidelines. Material non-compliance with laws, regulations and other stipulated requirements can act as a catalyst for increasing various other risks thereby increasing the overall risk of a bank.

Organisation Risk
Organisation risk arises on account of organisational bottlenecks in the form of inadequate or inappropriate structure, in relation to its business and the quality of its external and internal relationships. The organisation structure needs to be well defined and in tune with the legal and regulatory requirements for a bank. With frequent changes in the banking scenario, the organisation has to be flexible to meet the challenges posed by such changes.
Inappropriate relationships between the people within the organisation may affect the smooth functioning of the bank. Similarly, strained relationship between the people in the bank and the outsiders, viz., customers, regulatory authorities, group companies, etc. can pose a risk to the operations of the bank.

Management Risk
Management inadequacies and Corporate Governance. Management risk arises out of poor quality and lack of integrity of management. It is reflected in the quality of senior management personnel, their leadership quality, competence, integrity and their effectiveness in dealing with the problems encountered by the bank.

Commercial banks face risks in their day to day operations. While some of these risks are avoidable, others may not be easily foreseeable. However commercial banks should mitigate risks wherever and whenever possible.

Here are some of the risks commercial banks face:

1.Credit Risks: This is the danger of misfortune from a borrower who doesn’t make instalments as guaranteed. Henceforth the bank should only give credits with securities that can cover those advances.

2.Liquidity Risk: This danger happens when given security or resource can’t be exchanged rapidly sufficient for the market to keep away from misfortune or make the necessary increases. Thus the banks should attempt to set up resources available to be purchased on schedule just as get a very much educated intermediary to aid this capacity

3.Market Risk: This is an outer danger. This danger happens for the most part because the bank exercised in the capital market.

It is because of the unconventionality of value markets, product costs, loan fees, and credit spreads. To manage this danger and lessen the antagonistic impact radically, banks broaden their ventures or just contribute with contracts.

4. Operational Risks

Banks need to lead huge activities to be productive. Operational danger happens as the aftereffect of a bombed business measures in the bank’s everyday exercises.

Instances of operational risks would incorporate instalments credited to some unacceptable record or executing an off base request while managing in the business sectors, furnished theft, fire rate and so on.

None of the offices in a bank is insusceptible from operational dangers. Operational dangers emerge predominantly as a result of recruiting some inexperienced and untrained individuals or then again they could likewise happen if there is a breakdown of the data innovation frameworks.

Henceforth the bank should recruit trained people and ensure there is appropriate examination and support of innovation frameworks.

IWUALA CHIOMA FAVOUR
2017/249520
ECONOMICS
iwualafavour573@gmail.com

Some risks a bank faces can be internal or external.Some of the internal risks faced by banks include: Strategic Risk, Reputation Risk, Credit Risk, etc, while some of the external risks include: Funding and Liquidity Risk, Market Risk, Other operational Risk, etc. Credit risk is the biggest risk for banks. It occurs when borrowers or counterparties fail to meet contractual obligations. An example is when borrowers default on a principal or interest payment of a loan. Reputation is an extremely important intangible asset in the banking business.Customers like their money to be deposited at places which they believe follow safe and sound business practices. Hence, if there is any news in the media which projects a given bank in a negative light, such news negatively impacts the banks business. Liquidity risk is another kind of risk that is inherent in the banking business. Liquidity risk is the risk that the bank will not be able to meet its obligations if the depositors come in to withdraw their money. This risk is inherent in the fractional reserve banking system. Therefore, in this system, only a percentage of the deposits received are held back as reserves, the rest are used to create loans. Therefore, if all the depositors of the institution came in to withdraw their money all at once, the bank would not have enough money. This situation is called a bank run. This has happened countless times over the history of modern banking.
Modern day banks are not very concerned about liquidity risk. This is because they have the backing of the central bank. In case there is a run on a particular bank, the central bank diverts all its resources to the affected bank. Operational risk is the risk of loss due to errors, interruptions, or damages caused by people, systems, or processes. The operational type of risk is low for simple business operations such as retail banking and asset management, and higher for operations such as sales and trading. Losses that occur due to human error include internal fraud or mistakes made during transactions.
Prudent risk management can help banks improve profits as they sustain fewer losses on loans and investments.
Ways to decrease risks include diversifying assets, using prudent practices when underwriting, and improving operating systems.

Name:Meteke Joy Orimusue
Reg.no:2017/242430
Department:Economics
Website: metekejoy01.blogspot.com
Email:joymetex2000@gmai.com
RISKS AND RISK MANAGEMENT OF COMMERCIAL BANK
1.Credit risk
According to the Bank for International Settlements (BIS), credit risk is defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms. Credit risk is most likely caused by loans,acceptances, interbank transactions, trade financing, foreign exchange transactions, financial futures, swaps, bonds, equities, options, and in the extension of commitments and guarantees, and the settlement of transactions. In simple words, if person A borrows loan from a bank and is not able to repay the loan because of inadequate income, loss in business, death, unwillingness or any other reasons, the bank faces credit risk. Similarly, if you do not pay your credit card bill, the bank faces a credit risk.
Hence, to minimize the credit risk on the bank’s end, the rate of interest will be higher for borrowers if they are associated with high credit risk. Factors like unsteady income, low credit score, employment type, collateral assets and others determine the credit risk associated with a borrower.
2.Market risk
McKinsey defines market risk as the risk of losses in the bank’s trading book due to changes in equity prices, interest rates, credit spreads, foreign-exchange rates, commodity prices, and other indicators whose values are set in a public market. Bank for International Settlements (BIS) defines market risk as the risk of losses in on- or off-balance sheet positions that arise from movement in market prices. Market risk is prevalent mostly amongst banks who are into investment banking since they are active in capital markets. Market risk can be better understood by dividing it into 4 types depending on the potential cause of the risk:
Interest rate risk: Potential losses due to fluctuations in interest rate
Equity risk: Potential losses due to fluctuations in stock price
Currency risk: Potential losses due to international currency exchange rates (closely associated with settlement risk)
Commodity risk: Potential losses due to fluctuations in prices of agricultural, industrial and energy commodities like wheat, copper and natural gas respectively.
3.Operational risk
According to the Bank for International Settlements (BIS), operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk, but excludes strategic and reputation risk. Operational risk can widely occur in banks due to human errors or mistakes. Examples of operational risk may be incorrect information filled in during clearing a check or confidential information leaked due to system failure.
Operational risk can be categorized in the following way for a better understanding:
Human risk: Potential losses due to a human error, done willingly or unconsciously
IT/System risk: Potential losses due to system failures and programming errors
Processes risk: Potential losses due to improper information processing, leaking or hacking of information and inaccuracy of data processing.
4.Liquidity risk
This risk is the risk stemming from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize a loss. However if you find this definition complex, the term ‘liquidity risk’ speaks for itself. It is the risk that may disable a bank from carrying out day-to-day cash transactions.
5.Business risk
In general,this risk is seen as the possibility that a company will have lower than anticipated profits, or that it will experience a loss rather than a profit. In the context of a bank, business risk is the risk associated with the failure of a bank’s long term strategy, estimated forecasts of revenue and number of other things related to profitability. To be avoided, business risk demands flexibility and adaptability to market conditions.
6.Systemic risk
The global crisis of 2008 is the best example of a loss to all the financial institutions that occurred due to systemic risk. Systemic risk is the risk that doesn’t affect a single bank or financial institution but it affects the whole industry. Systemic risks are associated with cascading failures where the failure of a big entity can cause the failure of all the others in the industry.
7.Moral hazard
Moral hazard is a risk that occurs when a big bank or large financial institution takes risks, knowing thatsomeone else will have to face the burden of those risks. Economist Paul Krugman described moral hazard as “any situation in which one person makes the decision about how much risk to take, while someone else bears the cost if things go badly.
HOW CAN THESE RISKS BE MANAGED OR AVOIDED?
i) Standards and Reports The first of these risk management techniques involves two different conceptual activities, i.e., standard setting and financial reporting. They are listed together because they are the sine qua non of any risk system. Underwriting standards, risk categorizations, and standards of review are all traditional tools of risk management and control. Consistent evaluation and rating of exposures of various types are essential to understand the risks in the portfolio, and the extent to which these risks must be mitigated or absorbed. The standardization of financial reporting is the next ingredient. Obviously outside audits, regulatory reports, and rating agency evaluations are essential for investors to gauge asset quality and firm level risk. These reports have long been standardized, for better or worse.
(ii) Position Limits and Rules A second technique for internal control of active management is the use of position limits, and/or minimum standards for participation. In terms of the latter, the domain of risk taking is restricted to only those assets or counterparties that pass some prespecified quality standard.
(iii) Investment Guidelines and Strategies Investment guidelines and recommended positions within position limits and prescribed rules. Beyond this, guidelines offer firm level advice as to the appropriate level of active management, given the state of the market and the willingness of senior management to absorb the risks implied by the aggregate portfolio.
(iv) Incentive Schemes To the extent that management can enter incentive compatible contracts with line managers and make compensation related to the risks borne by these individuals, then the need for elaborate and costly controls is lessened.

NAME: EZIKE MARYCYNTHIA CHIAMAKA
REG NO: 2017/242944
EMAIL: marycynthiachiamaka95@gmail.com
DEPT: ECONOMICS

According to studies, most of the risks of commercial banks are internal risks while the rest are externally, so it is ok to say that yes the risks are mostly internal. Some of the internal risks of the commercial banks include credit, operational, market, and liquidity risk. Since banks are exposed to a variety of risks, they have well-constructed risk management infrastructures and are required to follow government regulations. If a business sets up risk management as a disciplined and continuous process for the purpose of identifying and resolving risks, then the risk management structures can be used to support other risk mitigation systems. They include planning, organization, cost control, and budgeting. In such a case, the business will not usually experience many surprises, because the focus is on proactive risk management.
Response to Risks
Response to risks usually takes one of the following forms:
Avoidance: A business strives to eliminate a particular risk by getting rid of its cause.
Mitigation: Decreasing the projected financial value associated with a risk by lowering the possibility of the occurrence of the risk.
Acceptance: In some cases, a business may be forced to accept a risk. This option is possible if a business entity develops contingencies to mitigate the impact of the risk, should it occur.
When creating contingencies, a business needs to engage in a problem-solving approach. The result is a well-detailed plan that can be executed as soon as the need arises. Such a plan will enable a business organization to handle barriers or blockage to its success because it can deal with risks as soon as they arise.

Eric-nnaji Chiamaka Ngozi
2017/249499
Economics department

Commercial banks face risks which may be external or internally induced. It is external when the banks have little to no control over the cause and internal when they have substantial control over the cause.
Four of the major risks of commercial banks include:
1. Credit risk: This is an external risk. This risk occurs as a result of loan defaulters. This risks includes delayed payment of loans and no payment at all. To deal with this type of risk, banks perform a thorough background check on the borrower and analyze how capable he/she is to pay back. Banks also give advice, supervise or keep track on what the loan is used for and how profitable that venture is. Personally, I don’t think the issue unpaid loans are avoidable in the banking business but Banks should always make provision for this risk without becoming insolvent.
2. Market risks: This is an external risk. This risk occur mostly as a result of the bank’s activities in the capital market. It is due to the unpredictability of equity markets, commodity prices, interest rates, and credit spreads. To deal with this risk and reduce the adverse effect drastically, banks diversify their investments or simply invest with contracts.
3. Operational risks: This is an internal risk. Operational risks affect all the departments in a bank. This risk occurs as a result of failed or mistaken business processes in the bank’s day to day activities. An example of this risk would be crediting of a wrong account or executing a wrong order. To deal with this, banks should employ the right and qualified people for the right job. Also, maintain adequate power supply especially during working hours. Banks maintain cyber security to avoid hackers on their sites.
4. Liquidity risks: This is an internal risk. Liquidity risk refers to the inability of a bank to access cash to meet funding obligations when depositors come to withdraw their money. This risk is inherent in the fractional reserve banking system. To deal with this, the Central Bank supports the banks if this risk ever occur. Commercial banks should avoid having a balance sheet which is overly concentrated on illiquid assets and should not rely overly on short-term sources of funds. They should also diversify the types of loans (long-term, short-term and medium-term loans) they give.

ugwoke faith chinazaekpere
2017/249582
Economics
A commercial bank is a financial institution which accepts deposits from the public and gives loans for the purposes of consumption and investment to make profit.
It can also refer to a bank, or a division of a large bank, which deals with corporations or large/middle-sized business to differentiate it from a retail bank and an investment bank. Commercial banks include private sector banks and public sector banks.
1)CREDIT RISK:
The major risk banks face is credit risk. It follows that the major risk banks must
measure, manage and accept is credit or default risk. It is the uncertainty associated with borrower’ s loan repayment. For most people in commercial banking, lending represents the heart of the Industry.
2) CONCENTRATION RISK
A new methodology adopted to evaluate the volatility in portfolio performance
predicated on the risk profile of the institution. The banking industry has relied heavily on prior experience as a predictor of future credit performance. Concentration risk is the aggregation of transaction and intrinsic risk within the portfolio and may result from loans to one borrower or one industry, geographic area, or line of business. Senior management must
define acceptable portfolio concentrations for each of these aggregations.
Apart from making loans, banks also hold a significant portion of securities. Some of these securities are held because of the treasury operations of the bank i.e. as a means to park money for the short term. However, many securities are also held as collateral based on which banks have given loans to their customers. The business of banking is therefore intertwined with the business of capital markets.
3) MARKET RISK:
Banks face market risks in various forms. For instance if they are holding a large amount of equity then they are exposed to equity risk. Also, banks by definition have to hold foreign exchange exposing them to Forex risks. Similarly banks lend against commodities like gold, silver and real estate which exposes them to commodity risks as well. In order to be able to mitigate such risks banks simply use hedging contracts. They use financial derivatives which are freely available for sale in any financial market. 
4) OPERATIONAL RISK:
Banks have to conduct massive operations in order to be profitable. Economies of scale work in the favor of larger banks. Hence, maintaining consistent internal processes on such a large scale is an extremely difficult task.Operational risk occurs as the result of a failed business processes in the bank’s day to day activities. Examples of operational risk would include payments credited to the wrong account or executing an incorrect order while dealing in the markets. None of the departments in a bank are immune from operational risks.
5) BUSINESS RISK:
The banking industry today is considerably advanced and diversified. Banks today have a wide variety of strategies from which they have to choose. Once such strategy is chosen, banks need to focus their resources on obtaining their strategic goals in the long run. Hence, there is always a risk that a given bank may choose the wrong strategy. As a result of this wrong choice, the bank may suffer losses and end up being acquired or may simply collapse.
6)REPUTATION RISK:
Reputation is an extremely important intangible asset in the banking business. Banks like JP Morgan bank, Chase bank, Citibank, Bank of America etc have all been in the business for hundreds of years and have stellar reputations. These reputations enable them to generate more business more profitably.Customers like their money to be deposited at places which they believe follow safe and sound business practices.
7) SYSTEMIC RISK:
Systemic risk arises because of the fact that the financial system is one intricate and connected network. Hence, the failure of one bank has the possibility to cause the failure of many other banks as well. This is because banks are counterparties to each other in a lot of transactions. Hence, if one bank fails, the credit risk event for the other banks becomes a reality.
8)MORAL HAZARD RISK:
The recent bailout of banks by many countries has created another kind of risk called the moral hazard. This risk is not faced by the bank or its shareholders. Instead, this risk is faced by the taxpayers of the country in which banks operate. Banks have become accustomed to taking excessive risk. If their risk pays off, they get to keep the returns. 
In other to reduce this risk banks has to improve continuous process of improving credit risk management in the bank if necessary, taking into account the changing information technology ICT and Industry 4.0 and the changing economic reality.

NAME: Okoronkwo Uchechukwu David
REG NO: 2017/241455
DEPARTMENT: Economics
EMAIL: uchechukwu.okoronkwo.241455@unn.edu.ng

firstly, it should be understood that due to the large size of some banks, exposure to risk is high and thus can cause bank failure and impact millions of people, thus it is by understanding the risks posed to banks that governments can set better regulations to encourage prudent management and decision-making.
The ability of a bank to manage risk also affects investors decisions, even if a bank can generate large revenues, lack of risk management can lower profits because of losses to loans.
Some of the risks that commercial banks face are;
1, Credit Risk
Credit risk is the biggest risk for banks. It occurs when borrowers or counterparties fail to meet up to contractual obligations, for instance when borrowers default on interest payment of a loan.
However, although banks cannot be fully protected from credit risk due to the nature of their business model, they can alternatively lower their exposure in several ways, that is since deterioration in an industry or issuer is often unpredictable, banks lower their exposure through the process of diversification and by doing so, during a credit downturn, banks are less likely to be overexposed to a category with large losses. Thus to lower their risk exposure, they can loan money to people with good credit histories, transact with high-quality counterparties, or own collateral to back up the loans.
2, Market Risk
Market risk mostly occurs from a bank’s activities in capital markets. It is due to the unpredictability of equity markets, commodity prices, interest rates, and credit spreads. But Banks are more exposed if they are heavily involved in investing in capital markets or sales and trading.
thus to avoid this risk, banks must avoid investing heavily into such markets
3, Liquidity Risk
Liquidity risk refers to the ability of a bank to access cash to meet funding obligations. Obligations include allowing customers to take out their deposits. The inability to provide cash in a timely manner to customers can result in a snowball effect. If a bank delays providing cash for a few of their customer for a day, other depositors may rush to take out their deposits as they lose confidence in the bank. This further lowers the bank’s ability to provide funds and leads to a bank run.
However regulations exist to lessen liquidity problems and they include the requirement for banks to hold enough liquid assets to survive for a period of time even without the inflow of outside funds.
4, Operational Risk
Operational risk is the risk of loss due to errors, interruptions or damages caused by people, systems, or processes. The operational type of risk is low for simple business operations such as retail banking and asset management, and higher for operations such as sales and trading. Losses that occur due to human error include internal fraud or mistakes made during transactions.
On a larger scale, fraud can occur through the breaching a bank’s cybersecurity and it can allow hackers to have access / steal customer information and money from the bank, and blackmail the institutions for additional money. In such a situation, banks lose capital and trust from customers. Damage to the bank’s reputation can make it more difficult to attract deposits or business in the future.
5, Business Risk
The banking industry today is considerably advanced and diversified. Banks today have a wide variety of strategies from which they have to choose. Once such strategy is chosen, banks need to focus their resources on obtaining their strategic goals in the long run.
Although, there is always a risk that a given bank may choose the wrong strategy and as a result of this wrong choice, the bank may suffer losses and end up being acquired or may simply collapse
Also, Banks who chose the subprime route to growth, which is a strategy for a bank to be the preferred lender to people who have less than perfect credit scores, but if the was to bust and thes banks had heavy exposures to such loans, they are doomed to suffer dire consequences.