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Regulatory Risk: When change in laws and regulations impact the business, Investment
scheme.
Market risk: Losses/Gains due to changes of facts and figures in the financial markets.
Liquidity risk: Risk due to difference in the assets and the liabilities.
Foreign exchange exposure risk : Risk of loss in the assets invested internationally over
foreign currency exchange rates
Interest rate risk: losses/gains due to change in interest rates of a bank while
investing/borrowing.
The regulatory structure of a bank helps maintaining the transparency between the bank, the
companies and organizations businesses. In a bank when deposits are matched with the loans
the regulatory risk comes in picture. The bank has to settle the rate of lending and the rate of
borrowing and hence, the cost of capital is affected. Regulatory risk arises when the interest
rates are changed by central banks and hence the commercial banks regulation has to be
revisited.
Capital requirements are a main tool of banking regulation. Settling them helps managing the
cost of capital for the bank and in turn the rates available to borrowers. According to standard
theory, in perfect and efficient capital markets, reducing banks leverage reduces the risk and
cost of equity but leaves the overall weighted average cost of capital unchanged.
Various frauds in banking system are
o Forgery.
o Account impersonation.
o Bribes/kickbacks.
o Insider trading.
o Money laundering.
o Willful blindness.
Risk is the potential of losing something of value, weighed against the potential to gain
something of value and with all these actions listed above there is always a loss.
Industry risks involved in banking are market risk, interest rate risk, credit risk etc.
Contagion affects the banking industry when one bank changes its policies and the other
competitors are affected. If we talk of the global scenario when a bank fails public and other
central banks are affected.
Systematic Risk can affect the banking system as it is the volatile risk that is there in the
industry. When interest rates in the market changes the value of assets like bonds and
debentures changes
Moral hazards involved in banking happens when one of the parties involved in a transaction
is not fair and is causing problems for the other party then a risk is there.
Yes, regulating the various banking and non-banking institutions help reducing the risk as
they help implementing transparency and a corporative business can be carried out. It also
helps reducing various kind of risk, increase the credibility of the banks and parties and allow
a fair allocation of credits.
The different types of risk in banking system are: