Banks are highly regulated organizations. They are at risk from regulatory and legislative changes that increase the costs of doing their business and may even prohibit them from undertaking it at all. They may breach regulatory requirements and be fined, face losing their license or suffer loss of reputation.
Model risk
Banks use models to estimate the value of instruments such as options and to assess the level of risk that the bank is exposed to in its trading activities. These models are complex and errors in these models pose a risk to banks. They may overpay for financial instruments or underestimate the level of market or trading risk being taken.