The finance and insurance industries of the United States account for approximately 7.2% of the nation’s GDP, but the U.S. finance industry is the largest and most liquid market in the world. It is the banking industry of the U.S. that supports the world’s largest economy through a diverse establishment of banking institutions and concentrations in private credit. Since the Great Recession of 2008, there is a new awareness of the need for more effective and proactive risk management solutions, but the haste to play the long-game may inadvertently ignore the daily risks of the banking industry. Institutions like GBTI Bank also have to contend with the threats and risks of operating in a global economy, with digitized services opening areas of risk in cybercrime. Awareness of the top risks faced by both national and global banking institutions can help prevent another global financial crisis.
Credit risk is a potentially devastating situation where a bank borrower or counterparty will not meet the contractual obligations of a lending situation. Interbank transactions, acceptances, loans, foreign exchange transactions, swaps, financial futures, bonds, transaction settlements, and equities are some of the many likely causes of credit risk. More simply put, persons who borrow from a bank may suddenly become unable to pay their loan obligations, causing a bank to face credit risk. Life situations can change in a moment, with issues like death, unemployment, long-term illness, or even unwillingness impacting a person’s ability to meet their payment requirements. Defaulting or falling behind on credit card bills also puts a negative credit risk on the bank. Both banks and lending institutions minimize the credit risks posed by borrowers by charging higher interest rates or requiring more collateral. Interbank transactions and foreign transactions also carry credit risk. Settlement delays or a failure to complete a successful transaction one end can be a loss of investment opportunity as well as financial loss.
This type of risk as defined as the losses that could be incurred in the trading process as a result of fluctuation interest rates, equity prices, foreign exchange rates, credit spreads, and commodity process. Any value that is set by the current conditions of the public market influences either gains or losses when looking at the balance sheet of a banking or financial investment. Capital market investors tend to experience these market fluctuations more often, with some of the more noted investment banks being Bank of America, Morgan Stanley, Goldman Sachs, and JP Morgan. With market risk, there are four types of concerns: interest rate risk, equity risk, currency risk, and commodity risk. These risks deal with situations related to fluctuations in interest rates, stock places, international currency exchange rates, and the prices of industrial, agricultural or energy commodities.
The risk of loss that is caused by failed or inadequate internal systems, people, or processes is what the Bank for International Settlements defines as operational risk. Although legal risk categories are a component of operational risk, reputations and strategic risks are excluded from this category. Human errors and mistakes can cause operational errors, just as can technological or software failures and weaknesses. Data breaches and leaking confidential information because of data breaches and failed security measures would be considered an operational risk, just as could an employee making an error in computing or filing. Human risk is the potential for loss incurred through willing or unconscious human error. An IR/System risk evaluates the potential loss that might arise from programming error or inaccurate information processing. The category of processes risk calculates the potential losses that result from hacking, leaking, inaccurate data processing, or improper information processing. The shift toward automated and digitized banking solutions increases the risk potential in each of these areas. Although issues with security breaches are included in processes risk, these situations can also be considered operational risk. Since there have been several financial institutions that have fallen victim to data breaches and exposed millions of consumers to data leaks, there has been an increased push for tech developments that can reduce exposure to these forms of attack.
An investment that isn’t able to be bought or sold quickly enough due to a lack of marketability can create a situation of liquidity risk. In shorter terms, liquidity risk is a situation that might prevent a bank from conducting cash transactions on a daily basis. During the 2008 global financial crisis, there were several banks that did not have the cash on hand to issue a customer that wanted to make a withdrawal. There are many reasons why a bank may not have the funds on hand to causes such a situation, but it is a devastating risk when it occurs.
The financial sector is foundational to the operations of both national and global economies. As seen in the past, this industry is not immune to crises, and one wrong move or investment can create a ripple effect across the globe.