What are the risk categories for banks?
The OCC has defined nine categories of risk for bank supervision purposes. These risks are: Credit, Interest Rate, Liquidity, Price, Foreign Exchange, Transaction, Compliance, Strategic and Reputation. These categories are not mutually exclusive; any product or service may expose the bank to multiple risks.
Risks in the banking sector are of many types. These include the risks associated with credit, market, operational, liquidity, business, reputation, and systematic.
There are many ways to categorize a company's financial risks. One approach for this is provided by separating financial risk into four broad categories: market risk, credit risk, liquidity risk, and operational risk.
IHS Markit's Banking Risk scores are reported on a 0–100 scale, with 0 equivalent to no risk of a banking crisis and 100 equivalent to extreme risk. These scores are broken out into seven scoring buckets that are conceptually and illustratively benchmarked to a generic AAA to D rating scale.
As indicated above, the five types of risk are operational, financial, strategic, compliance, and reputational. Let's take a closer look at each type: Operational. The possibility that things might go wrong as the organization goes about its business.
- Capacity. Do I have experience running a business? ...
- Cash Flow. Is my business profitable? ...
- Capital. Do I have sufficient reserves, or other people who could invest in the business, should unexpected problems or hard times arise?
- Collateral. ...
- Character. ...
- Conditions. ...
- Commitment.
Information at MIT falls into one of three risk levels: Low, Medium, or High. Level classifications are based on who should have access to the information and how much harm would be done if it were disclosed, modified, or unavailable.
The major risks faced by banks include credit, operational, market, and liquidity risks. Prudent risk management can help banks improve profits as they sustain fewer losses on loans and investments.
Widely, risks can be classified into three types: Business Risk, Non-Business Risk, and Financial Risk.
Definition of risk
It is an inherent part of any business or project and needs to be understood, managed, and mitigated effectively. Risk can come in various forms and can be categorized into four main categories: financial risk, operational risk, strategic risk, and compliance risk.
What are the 9 types of risk in banking?
The OCC has defined nine categories of risk for bank supervision purposes. These risks are: Credit, Interest Rate, Liquidity, Price, Foreign Exchange, Transaction, Compliance, Strategic and Reputation. These categories are not mutually exclusive; any product or service may expose the bank to multiple risks.
Credit risk is the potential that bank borrower will fail to repay and can be measure by using credit risk rating method. Market risk is the risk that value will be lost due to a change in some market variable like change in interest rate or change in foreign exchange rate.
High-risk customers are individuals or entities that, due to specific characteristics or circ*mstances, pose an elevated level of risk for businesses or financial institutions. These customers may be more likely to engage in activities associated with money laundering, financial crimes, or other illicit behavior.
Operational risk has been defined by the Basel Committee on Banking Supervision1 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 reputational risk.
Traditional banking is built on four pillars: SME lending, insured deposit taking, access to lender of last resort, and prudential supervision.
The 5 Cs of credit or 5 Cs of banking are a common reference to the major elements of a banker's analysis when considering a request for a loan. Namely, these are Cash Flow, Collateral, Capital, Character, and Conditions.
The lender will typically follow what is called the Five Cs of Credit: Character, Capacity, Capital, Collateral and Conditions. Examining each of these things helps the lender determine the level of risk associated with providing the borrower with the requested funds.
2024 in Brief
There are no bank failures in 2024. See detailed descriptions below.
As the primary federal regulator for most community banks, the FDIC has a unique perspective on these institutions. The Risk Review presents key risks to banks in four broad categories—credit risk, market risk, operational risk, and climate-related financial risk.
As we move into 2024, experts predict we are on track to remain in a challenging environment for financial markets. Continuing high inflation, escalating lending costs, tightened margins, increased regulation, and cybersecurity threats all remain relevant factors in the current risk landscape.
What are the two main categories of risk?
Types of Risk
Broadly speaking, there are two main categories of risk: systematic and unsystematic. Systematic risk is the market uncertainty of an investment, meaning that it represents external factors that impact all (or many) companies in an industry or group.
The two major types of risk are systematic risk and unsystematic risk. Systematic risk impacts everything. It is the general, broad risk assumed when investing. Unsystematic risk is more specific to a company, industry, or sector.
Risk assessment and identification involves searching for anything that threatens financial stability. The threat can be internal, such as operational inefficiencies, or external, such as market volatility. Historical data analysis, industry research, and brainstorming sessions can be useful in identifying risk.
1. Cost Risk. Cost risk is probably the most common project risk of the bunch, which comes as a result of poor or inaccurate planning, cost estimation, and scope creep.
(i) (d) Account Risk is Not a type of risk in Banking Sector. The major risks for banks include credit, operational risk, market and liquidity risk.
References
- https://www.thestreet.com/personal-finance/banks-most-at-risk-morningstar
- https://www.linkedin.com/pulse/ask-banker-what-financial-ratios-most-important-bank-jay-mccabe
- https://www.kmco.com/insights/3-ratios-that-are-important-to-your-lender/
- https://corporatefinanceinstitute.com/resources/commercial-lending/lending-ratios/
- https://www.piranirisk.com/blog/4-types-of-financial-risks
- https://www.bbva.com/en/economy-and-finance/how-is-a-banks-credit-quality-measured/
- https://www.worldbank.org/en/publication/gfdr/gfdr-2016/background/financial-stability
- https://www.marketwatch.com/guides/banking/largest-banks-in-the-us/
- https://www.businessinsider.com/personal-finance/best-banks
- https://www.investopedia.com/ask/answers/062415/what-are-major-categories-financial-risk-company.asp
- https://www.valueresearchonline.com/stories/48820/how-to-analyse-banks/
- https://www.datarails.com/5-key-financial-ratios/
- https://cua.com/viewport/mobile/Home/Advice/CUAdvice/Five-Cs-of-Credit/
- https://www.careratings.com/upload/CompanyFiles/PR/202310121051_Federal_Bank_Limited.pdf
- https://www.investopedia.com/ask/answers/042815/what-metrics-can-be-used-evaluate-companies-banking-sector.asp
- https://www.investopedia.com/articles/active-trading/082615/key-financial-ratios-analyze-retail-banks.asp
- https://www.fdic.gov/resources/resolutions/bank-failures/in-brief/bfb2024.html
- https://www.forbes.com/advisor/banking/largest-banks-in-the-us/
- https://www.investopedia.com/terms/e/efficiencyratio.asp
- https://www.investopedia.com/ask/answers/040115/what-most-important-c-five-cs-credit.asp
- https://www.coursehero.com/file/p536ms1d/4-Why-would-you-not-use-a-DCF-for-a-bank-or-other-financial-institution-Banks/
- https://www.capitalone.com/bank/fdic/
- https://www.fdic.gov/analysis/risk-review/2022-risk-review/2022-risk-review-introduction.pdf
- https://strategiccfo.com/articles/banking-financing/5-cs-of-credit-5-cs-of-banking/
- https://www.investopedia.com/ask/answers/041415/what-are-some-common-measures-risk-used-risk-management.asp
- https://www.primeres.com/bobmorris/learning-center/debt-to-income-ratios
- https://assets.marketplace.spglobal.com/_assets/documents/marketplace/ihs-markit-banking-risk-ratings-methodology.pdf
- https://corporatefinanceinstitute.com/resources/wealth-management/bank-specific-ratios/
- https://www.forbes.com/advisor/banking/list-of-failed-banks/
- https://www.6clicks.com/resources/answers/what-are-the-4-main-categories-of-risk
- https://www.marketplace.org/2023/06/02/just-how-safe-are-credit-unions/
- https://www.upflip.com/blog/how-to-start-a-bank
- https://www.occ.treas.gov/news-issuances/news-releases/1996/nr-occ-1996-2a.pdf
- https://www.meritnation.com/karnataka-class-12-commerce/business-studies/business-finance-and-marketing-ncert-solution/financial-management/ncert-solutions/102_18_1880_3727_263_30457
- https://www.linkedin.com/advice/1/what-some-effective-risk-response-strategies-techniques
- https://www.indeed.com/career-advice/career-development/positive-risk
- https://www.investopedia.com/terms/t/too-big-to-fail.asp
- https://www.indeed.com/career-advice/career-development/solvency-ratio
- https://groww.in/blog/how-to-check-financial-health-of-bank
- https://www.fdic.gov/resources/resolutions/bank-failures/failed-bank-list/
- https://gocardless.com/en-au/guides/posts/interest-coverage-ratio/
- https://finance.yahoo.com/news/7-bank-stocks-least-likely-192442317.html
- https://quickbooks.intuit.com/r/banking/how-to-tell-if-a-bank-is-healthy/
- https://www.neotas.com/glossary/who-are-high-risk-customers-types-of-high-risk-customers/
- https://en.wikipedia.org/wiki/Ethical_banking
- https://www.investopedia.com/financial-edge/0910/6-basic-financial-ratios-and-what-they-tell-you.aspx
- https://projectriskcoach.com/7-ways-to-identify-risks/
- https://www.noradarealestate.com/blog/is-bank-of-america-in-trouble/
- https://www.mha-it.com/2023/04/27/reviewing-the-five-types-of-risk/
- https://www.investopedia.com/terms/c/currentratio.asp
- https://icmai.in/upload/Students/MQP_2022/Final/Paper20B_Set1_Sol.pdf
- https://www.wellsfargo.com/financial-education/basic-finances/manage-money/options/fdic/
- https://www.forbes.com/advisor/banking/safest-banks-in-the-us/
- https://www.simplilearn.com/financial-risk-and-types-rar131-article
- https://www.statista.com/chart/29902/largest-banks-in-the-us-by-domestic-deposits/
- https://rbi.org.in/upload/notification/pdfs/66813.pdf
- https://coincodex.com/article/33788/worst-banks-in-america/
- https://apnews.com/article/business-financial-services-signature-bank-6aa3564a8acda9098929abe4741fcbfd
- https://finance.yahoo.com/news/us-banks-trust-hard-earned-154119069.html
- https://www.simplilearn.com/common-project-risks-article
- https://gocardless.com/en-us/guides/posts/liquidity-coverage-ratio/
- https://economictimes.indiatimes.com/definition/risk
- https://money.slickdeals.net/articles/safest-banks-in-the-us/
- https://corporatefinanceinstitute.com/resources/career-map/sell-side/risk-management/risk/
- https://www.stlouisfed.org/publications/regional-economist/october-2003/credit-unions-make-friendsbut-not-with-bankers
- https://bankingjournal.aba.com/2024/01/top-bank-risks-for-2024/
- https://www.cusocal.org/Learn/Financial-Guidance/Blog/Are-Credit-Unions-Safer-than-Banks
- https://www.nber.org/papers/w23930
- https://gfmag.com/banking/worlds-safest-banks-2019/
- https://www.bankrate.com/banking/biggest-banks-in-america/
- https://www.investopedia.com/terms/p/purerisk.asp
- https://www.zurich.ie/funds/risk-ratings/
- https://apnews.com/article/wells-fargo-comptroller-of-currency-sales-practices-scandal-d3f41b3dbab4de74462fd3fe2585d50e
- https://www.ziprecruiter.com/Salaries/What-Is-the-Average-Bank-Owner-Salary-by-State
- https://www.imf.org/en/Blogs/Articles/2023/10/16/new-look-at-global-banks-highlights-risks-from-higher-for-longer-interest-rates
- https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID3109267_code2748987.pdf?abstractid=3109267&mirid=1
- https://www.gurufocus.com/term/rank_balancesheet/BAC/Financial-Strength/BAC
- https://republicsmetoolkit.com/the-7-cs-of-credit/
- https://www.thebalancemoney.com/how-to-tell-if-your-bank-is-safe-or-in-trouble-315800
- https://www.sml.texas.gov/mortgage-origination/red-flag-rules/
- https://analystprep.com/cfa-level-1-exam/fixed-income/financial-ratios-in-corporate-credit-analysis/
- https://www.scribd.com/document/236693906/LECTURE-NO-4-5Cs-and-7Ps-of-Credit
- https://onlinedegrees.scu.edu/media/blog/understanding-financial-risk-management
- https://finance.yahoo.com/news/4-most-popular-banks-millionaires-150054420.html
- https://ocro.stanford.edu/enterprise-risk-management-erm/key-definitions/definition-risk-level
- https://www.rba.gov.au/publications/fsr/2024/mar/
- https://infoprotect.mit.edu/risk-classifications
- https://www.news18.com/business/are-these-3-indian-banks-too-big-to-fail-read-to-know-more-7326211.html
- https://www.creditdonkey.com/safest-banks-in-the-us.html
- https://www.nerdwallet.com/article/banking/is-my-money-safe-in-a-bank
- https://www.creditdonkey.com/millionaires-bank-account.html
- https://www.wolfandco.com/resources/insights/risks-challenges-facing-financial-institutions-2024/
- https://www.linkedin.com/pulse/10-worst-banks-america-karen-e-peyton-
- https://www.nerdwallet.com/article/banking/largest-banks-in-the-us
- https://corporatefinanceinstitute.com/resources/career-map/sell-side/risk-management/major-risks-for-banks/
- https://testbook.com/banking-awareness/risks-in-banking-sectors