Skip to content

Tag Archives: loans

Model risk

Sunday, November 29, 2009

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 [...]

Filed in Model risk | Also tagged , , , | Comments (0)

Liquidity risk

Sunday, November 22, 2009

Banks are usually funded with relatively liquid, short-term deposits which are lent out long term as loans. Loans are inherently illiquid. Companies and individuals rarely borrow unless they have a financing need. Banks face the risk that a large portion of their depositors will demand their funds back at the same time. Management has to [...]

Filed in Liquidity risk | Also tagged , , , | Comments (0)

Market risk

Monday, November 16, 2009

This is the risk that the prices of financial instruments, such as equities, in which a bank has a position falls. This could result in the bank suffering unrealized losses on any open positions it has.

Filed in Market risk | Also tagged , , , , | Comments (0)

Foreign currency risk

Sunday, November 15, 2009

A foreign bank that borrows US$ and lends it out in its local currency is exposed to exchange risk. The main risk here is that the US$ appreciates against the local currency leaving it with a liability that in local currency terms it is greater than the value of its matching asset.

Filed in Foreign currency risk | Also tagged , , , , | Comments (0)

Interest rate risk

Saturday, November 14, 2009

Bank balance sheets are made up of a mix of fixed and floating rate assets and liabilities whose composition is continually changing over time. A bank that makes a lot of fixed rate loans, such as car loans, funded with floating rate deposits is exposed to the risk that interest rates rise. This will push [...]

Filed in interest rate risk | Also tagged , , , , | Comments (0)