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INTRODUCTION

India is one of the emerging economies, which have witnessed significant development in the stock markets during the liberalization policy initiated by the government. And Indian stock market is largely integrated with the world markets. It is clear that the investing in banking shares include high risk at the same time it earns extremely negative return which is revealed by the performance analyses on selected banking shares. Investing in stocks is a risky business. There are some risks which can control over and others that can only guard against. Most of these risks affect the market or the economy and require investors to adjust portfolios or ride out the storm. Banks play an important role in supporting economic growth. Banking and financial services sector funds have proved to be more volatile than the pure diversified equity funds which make some of them a high risk proposition. Investment includes high risk at the same time it earns higher return unusually high returns may not be sustainable. Since the banking industry is under the control of Reserve Bank of India (RBI), it is adversely used as the tool to control the external problems like inflation, interest rate, and money supply. Because of this, there is a high instability in the share price that reduces the real investors interest. The expansion of the banking sector has increased business potential, but has also changed the nature of the risks faced by the investors to invest.

BANKING RISKS:
Risk can be defined as the combination of the probability of an event and its consequences. In business industry, risks are invisible and intangible uncertainties which might materialize into adverse variations of profitability or in future losses. The types and degree of risks a bank may be exposed depend upon a number of parameters such as its size, complexity business activities, volume etc. Generally the banks face Credit, Market, Liquidity, and Operational, Compliance / Legal / Regulatory and Reputation risks which will be analyzed below. In all types of risks, there is the possibility to have opportunities for benefit or threats to success. Risk Management is widely considered to deal with both positive and negative aspects of risk. Therefore this attitude faces risk from both perspectives. On the other hand, conservatives support that consequences are only negative and therefore the management of safety risk is focused on prevention and elimination of losses. There are multiple definitions of risk. Each of us has a definition of what risk is, and all of us recognize a wide range of risks. Some of the more widely discussed definitions of risk include the following which investors face:

The likelihood an undesirable event will occur The magnitude of loss from an unexpected event The probability that things wont go right The effects of an adverse outcome

Banks face several types of risk. All the following are examples of the various risks banks encounter and have direct impact on performance: Borrowers may submit payments late or fail altogether to make payments. Depositors may demand the return of their money at a faster rate than the bank has reserved for. Market interest rates may change and hurt the value of a banks loans. Investments made by the bank in securities or private companies may lose value. Human input errors or fraud in computer systems can lead to losses. These risks will have an impact on investors decision to invest. To monitor, manage, and measure these risks, banks are actively engaged in risk management. In a bank, the risk management function contributes to the management of the risks a bank faces by continuously measuring the risk of its current portfolio of assets and other exposures, communicating the risk profile of the bank to other bank functions and by taking steps either directly or in collaboration with other bank functions to reduce the possibility of loss or to mitigate the size of the potential loss.

The not-for-profit sector


It has been observed that during the year between 2007 and the end of last year shareholders in banks globally have lost almost 10% of their investment each year, according to the Boston Consulting Group. Such sharp falls in shareholder value are not just distressing for investors. If the shares and debt issued by banks are not meant for investment, then over time the banking system will have to shrink or be nationalized. There are three reasons why the banks have been such a bad bet. The first is weakness in Western economies, which has led to elevated losses, subdued demand for credit and deleveraging by the banks themselves. With returns on assets remaining largely unchanged, the industry's total profits are likely to keep falling. A second reason is worries about sovereign defaults. In the second half of last year European banks sold virtually none of the long-term bonds that they use, alongside deposits, to finance loans. These markets have slowed down slightly since the European Central Bank (ECB) provided more than 1 trillion ($1.3 trillion) in three-year loans to European banks. But they are still fragile, partly because banks have pledged collateral to the ECB, leaving less to repay bondholders if a bank were to go bust. Simon Samuels, an analyst at Barclays,

points out that almost five years since the start of the financial crisis, European banks are more dependent on state support than ever. What we have, in effect, is nationalisation via the debt markets, he says. If you can't get a private-sector debt model to work then there is no real investible equity. The weak economy and worries over the euro area are, with some luck, transient problems. Yet weighing on investors' minds is a third concern: the impact that regulation will have on banks' long-term profitability and the safety of their debt. Returns on equity have fallen precipitously, from about 15% before the crisis to below 10% now. British banks' returns have slipped from almost 20% to about 5% year 2011. But this doesnt mean that going down of profit and return on equity of banks affect the investors decision; there are various other factors of risks which have to deal with.

SCENARIOS CONSIDERING RISK AND UNCERTAINTY


VARIOUS PARAMETERS TO ASSES THE BANKS PERFORMANCE
With the worlds two top global rating agencies having divergent views about the Indian banking industry, investors in this sector are bound to get confused. Investors faces problem like which rating agency to believe? Should they invest in banking stocks? Questions such as these would be paramount in the minds of investors looking for an opportunity in this sector. However, rating is not the only criterion to look at when assessing a sector. Look at parameters specific to that sector as well. It is essential that you consider some variables when assessing the banking sector, too like for instance, when companies pay advance taxes during each quarter, market analysts keep a close watch on the amount of tax each company pays. A substantial rise in tax payment indicates that the company would report robust numbers and this could give a boost to the stocks. So in this case, the news of tax payment gets priced-in in the stock. Non-performing assets: A loan that does not meet its stated principle and interest payment that becomes NPA for the bank. Loans on which a customerindividual or institutional stops paying dues to the bank comprise NPAs. When there is hike in the key policy rate- the rate at which RBI lends to the bank (repo) and the rate at which RBI accepts deposits from

the bank (reverse repo)loans become dearer for the borrower. This in turn results in sharp increase in the level of non-performing assets (NPA). Led by State Bank of India (SBI), the countrys largest lender, most government-owned banks have reported a sharp increase in NPAs. For the second quarter ended 30 September 2011, SBI reported a 46% rise in NPAs to Rs 33,946 crore. Similarly, during the second quarter of 2011-12, Punjab National Bank, the second largest government-owned bank, reported a jump of 29% in its bad loans to Rs 5,150 crore. In terms of businesses, government-owned banks account for close to 70% of the overall banking industry. Even some private sector banks, including largest private sector bank ICICI Bank Ltd, has reported a rise in NPAs. And if rates continue to remain high, given a slowing economy, the level of bad loans is expected to rise further. If the economy slows down, there would definitely be stress on the asset of the banks. Project execution would get delayed and that in turn would result in delayed payments, rise in restructuring or may even result in higher NPAs, In fact, this is the main reason why Moodys has downgraded the Indian banking s ystem to negative and hence give a negative outlook on the banking sector at the moment Pressure on margins: Regardless of the sharp increase in bad loans, most of the banks have managed to maintain their net interest margin (NIM). NIM is the difference between the interest banks receive on their advances and the interest they pay to depositors. Higher the NIM, the better it is for the banks. In fact, some banks have reported a sharp increase in their NIMs. During the second quarter of 2011, SBI reported NIM of 3.79% compared with 3.43% a year ago. Incidentally, this is SBIs highest NIM ever. For the better profitability of the banks it is necessary to balance the spread of lending and deposit. If there is rise in the deposit interest rate then bank will pay higher rate and in return NIM will drop. So any drop in NIMs will hit the profitability of banks and thereby their stocks. Economic situation: A prolonged slowdown in advanced economies would weaken the growth prospects of emerging market economies. When the GDP growth increases, economic situation strengthens which lead to decrease in interest rate and if there is a slowdown in advanced economic would also weaken the growth prospects of emerging market economies. While on one hand the slowing economy may lead to higher NPAs, on the other it would mean slower credit growth. Slowdown in economy as well as credit growth does not augur well for banks. Regulatory Risk: as banks accept deposit from public obviously better governance is expected from them. This entails multiplicity of regulatory controls. Many Banks, having already gone for public issue, have a greater responsibility and accountability in this regard. As banks deal with public funds and money, they are subject to various regulations. The various regulators include Reserve Bank of India (RBI), Securities Exchange Board of India (SEBI), Department of Company Affairs (DCA), etc. Moreover, banks should ensure

compliance of the applicable provisions of The Banking Regulation Act, The Companies Act, etc. Transparency. The difficulties investors face is to figure out the degree of risk in bank portfolios. According to one of the article, the biggest cause of panic during the financial crisis was that it was difficult to tell from looking at a particular banks disclosure whether it might suddenly implode. Some of the analyst says that worst time has passed and banking industry has reformed and fixed the problems. Prices for bank stocks are still far below their pre-recession highs, and if the industry really has fixed its problems the shares look like terrific bargains. The banking sector still faces big challenges, but greater transparency will boost investor confidence and also encourage banks to manage risk better internally.Since there could be some more downside left, it is better to invest through systematic investment plans rather than putting in a lump sum.

RISK AND UNCERTAINTY IN BANKING SECTOR


INVESTMENT RISK
When you invest, you take certain risks. With insured bank investments, such as certificates of deposit (CDs), you face inflation risk, which means that you may not earn enough over time to keep pace with the increasing cost of living. With investments that aren't insured, such as stocks, bonds, and mutual funds, you face the risk that you might lose money, which can happen if the price falls and you sell for less than you paid to buy. If you prefer to avoid risk and put your money in an FDIC-insured certificate of deposit (CD) at your bank, the most you can earn is the interest that the bank is paying. This may be good enough in some years, say, when interest rates are high or when other investments are falling. But on average, and over the long run, stocks and bonds tend to grow more rapidly, which would make it easier or even possible to reach your savings goals. That's because avoiding investment risk entirely provides no protection against inflation, which decreases the value of your savings over time. On the other hand, if you concentrate on only the riskiest investments, it's entirely possible, even likely, that you will lose money. For many people, it's best to manage risk by building a diversified portfolio that holds several different types of investments. This approach provides the reasonable expectation that at least some of the investments will increase in value over a period of time. So even if the return on other investments is disappointing, your overall results may be positive. Just because you take investment risks doesn't mean you can't exert some control over what happens to the money you invest. In fact, the opposite is true. If you know the types of risks you might face, make choices about those you are willing to take, and understand how to

build and balance your portfolio to offset potential problems, you are managing investment risk to your advantage. So, before investing in banking sector it is necessary to do research on risk faced by the banks. There are various risks faced by the banking industry which have an impact on the investment portfolios of the investors. Types of Investment Risk There are many different types of investment risk. The two general types of risk are: Losing money, which you can identify as investment risk Losing buying power, which is inflation risk It probably comes as no surprise that there are several different ways you might lose money on an investment. To manage these risks, you need to know what they are. Most investment risk is described as either systematic or non systematic.

Systematic Risk:
Systematic risk is also known as market risk and relates to factors that affect the overall economy or securities markets. Systematic risk affects all companies, regardless of the company's financial condition, management, or capital structure, and, depending on the investment, can involve international as well as domestic factors. Here are some of the most common systematic risks: Systemic risk refers to the possibility that a failure at a firm, in a market segment, or to a settlement system could cause a domino effect throughout the financial markets affecting one financial institution after another or a crisis of confidence among investors, creating illiquid conditions in the marketplace. The domino effect refers to the risk hidden under the interconnection of several sectors in market and begins when the disorder of one firm or one segment of the market can affect and cause failure in segments of or throughout the entire financial system. The interconnection of obligations among the same institutions and with the cash markets exacerbates that risk. Another aspect of systemic risk refers to the possibility that some systemic factors can affect and change the asset value. By its nature, this risk can be hedged, but cannot be diversified completely away and that drops it in the category of the undiversifiable risks. All investors assume this type of risk, whenever assets owned or claims issued can change in value as a result of broad economic factors meaning that systemic risk comes in many different forms. For the banking sector, however, two are of greatest concern, namely variations in the general level of interest rates and the relative value of currencies. In a similar manner, some institutions with significant investments in one commodity such as oil, through their lending activity or geographical franchise, concern themselves with commodity price risk. Risks associated with unexpected commodity price fluctuations that may have a direct or indirect negative effect on a banks net income and net worth.

MARKET RISK
It is defined as the possibility of loss caused by changes in the market variables such as interest rate, foreign exchange rate, equity price and commodity price. It is the risk of losses in, various balance sheet positions arising from movements in market prices. Market risk includes the risk of the degree of volatility of market prices of bonds, securities, equities, commodities, foreign exchange rate etc., which will change daily profit and loss over time; its the risk of unexpected changes in prices or rates. It also addresses the issues of Banks ability to meets its obligation as and when due, in other words, liquidity risk. Market risk involves the risk that prices or rates will adversely change due to economic forces and contains the movements in equity and interest rate markets, currency exchange rates, and commodity prices (factors that also affect systemic risk). Market risk can also include the risks associated with the cost of borrowing securities, dividend risk, correlation risk and liquidation risk. Types of market risk Interest-rate risk describes the risk that the value of a security will go down because of changes in interest rates. For example, when interest rates overall increase, bond issuers must offer higher coupon rates on new bonds in order to attract investors. The consequence is that the prices of existing bonds drop because investors prefer the newer bonds paying the higher rate. On the other hand, there's also interest-rate risk when rates fall because maturing bonds or bonds that are paid off before maturity must be reinvested at a lower yield. Interest rate risk is the largest market risk in the banking book. A bank's interest rate risk reflects the extent to which its financial condition is affected by changes in market interest rates. There are two different ways of thinking about such effects when analysing banks' exposure to interest rate risk: the net interest income risk measure and the investment risk measure. The income risk measure is employed to assess the impact of a change in overall interest rate level to the net interest income from the banking book, whereas the investment risk measure is employed to assess changes in the market value of the trading portfolio (on and off balance sheet items available for sale) in response to interest rate changes. Various economic forces affect the level and direction of interest rates in the economy. Interest rates typically climb when the economy is growing, and fall during economic downturns. Similarly, rising inflation leads to rising interest rates (although at some point, higher rates themselves become contributors to higher inflation), and moderating inflation leads to lower interest rates. Inflation is one of the most influential forces on interest rates.

Equity price risk: The price risk associated with equities also has two components General market risk refers to the sensitivity of an instrument or portfolio value to the change in the level of broad stock market indices. Specific risk refers to that portion of the stocks price volatility that is determined by characteristics specific to the firm, such as its line of business, the quality of its management, or a breakdown in its production process. The general market risk cannot be eliminated through portfolio diversification while specific risk can be diversified away. Equity price risk refers to the risk arising from the volatility in the stock prices. While talking about equity risk, it is important to differentiate between systematic risk and unsystematic risk. Systematic risk refers to the risk due to general market factors and affects the entire industry. It cannot be diversified away. Unsystematic risk is the risk specific to a company that arises due to the company specific characteristics. According to portfolio theory, this risk can be eliminated through diversification.

Currency risk occurs because many world currencies float against each other. If money needs to be converted to a different currency to make an investment, any change in the exchange rate between that currency and yours can increase or reduce your investment return. You are usually only impacted by currency risk if you invest in international securities or funds that invest in international securities.

Foreign Exchange Risk maybe defined as the risk that a bank may suffer losses as a result of adverse exchange rate movements during a period in which it has an open position, either spot or forward, or a combination of the two, in an individual foreign currency. The banks are also exposed to interest rate risk, which arises from the maturity mismatching of foreign currency positions. Even in cases where spot and forward positions in individual currencies are balanced, the maturity pattern of forward transactions may produce mismatches. As a result, banks may suffer losses as a result of changes in premium or discounts of the currencies concerned. The three important issues that need to be addressed in this regard are: 1. Nature and magnitude of exchange risk 2. Exchange managing or hedging for adopted be to strategy> 3. The tools of managing exchange risk As with most risks, currency risk can be managed to a certain extent by allocating only a limited portion of your portfolio to international investments and diversifying this portion across various countries and regions.

Liquidity risk is the risk that you might not be able to buy or sell investments quickly for a price that is close to the true underlying value of the asset. Sometimes you may not be able to sell the investment at all if there are no buyers for it. Liquidity risk is usually higher in over-the-counter markets and small-capitalization stocks. Foreign investments can pose liquidity risks as well. The size of foreign markets, the number of companies listed, and hours of trading may limit your ability to buy or sell a foreign investment.

In general, liquidity risk is referred to the banks inability to make its dai ly money transactions. More specific, liquidity risk is the probability that a bank cannot meet its obligations and commitments to its depositors and borrowers. Furthermore, this probability depends on other, further factors, like industry and economy-wide factors (systemic risk), and bank specific risks. Liquidity risk arises on both sides of the balance bank sheet. On the liability side, liquidity risk represents the inability of banks to satisfy their depositors, especially in period of panic and loss of trust to the banks which leads to massive deposit withdrawals. On the asset side, liquidity risk represents the banks inability to have the appropriate assets to contract new loans, advances or facilities, and make new investments in opportunities. So, the perfect combination for a banks viability and the elimination of liquidity risk is the simultaneous maturity of its assets and liabilities. Liquidity risk refers to multiple dimensions: inability to raise funds at normal cost, market liquidity risk and asset liquidity risk. When the credit ability of a bank becomes difficult, the cost of funding becomes expensive, so the problem extends beyond pure liquidity issues while the cost of funding is critical for banks profitability. And the problem is bigger when is spread to the whole market where the cost of funding is much higher because of the general unwillingness to transact. Finally, is very important how liquid the assets are; the more they are, the best serve the current obligations without external funding. Liquidity risk might become a major risk for the banking portfolio and maybe end up as the risk of a funding crisis. That results from unexpected events: a large charge off, loss of confidence, or a crisis of national proportion such as a currency crisis. Extreme lack of liquidity results in bankruptcy and that makes liquidity risk a fatal risk. However, extreme conditions are often the outcome of other risks. Finally, liquidity risk also exists when a party to a securities instrument may not be able to sell or transfer that instrument quickly and at a reasonable price, and as a result, incur a loss. So, liquidity risk includes the possibility that a firm will not be able to unwind or hedge a position. Inflation risk describes the risk that increases in the prices of goods and services, and therefore the cost of living, reduce your purchasing power. Let's say a can of soda increases from $1 to $2. In the past, $2 would have bought two cans of soda, but now $2 can buy only one can, resulting in a decline in the value of your money.

Inflation risk and interest rate risk are closely tied, as interest rates generally rise with inflation. Because of this, inflation risk can also reduce the value of your investments. For example, to keep pace with inflation and compensate for the loss of purchasing power, lenders will demand increased interest rates. This can lead to existing bonds losing value because, as mentioned above, newly issued bonds will offer higher interest rates. Inflation can go in cycles, however. When interest rates are low, new bonds will likely offer lower interest rates.

Country risk and Socio political risk: This is the possibility that instability or unrest in one or more regions of the world will affect investment markets. Terrorist attacks, war, and pandemics are just examples of events, whether actual or anticipated, that impact investor attitudes toward the market in general and result in system-wide fluctuations in stock prices. Some events, such as the September 11, 2001, attacks on the World Trade Center and the Pentagon, can lead to wide-scale disruptions of financial markets, further exposing investments to risks. Similarly, if you are investing overseas, problems there may undermine those markets, or a new government in a particular country may restrict investment by non-citizens or nationalize businesses. It comprises of Transfer Risk arising on account of possibility of losses due to restrictions on external remittances; Sovereign Risk associated with lending to government of a sovereign nation or taking government guarantees; Political Risk when political environment or legislative process of country leads to government taking over the assets of the financial entity (like nationalization, etc) and preventing discharge of liabilities in a manner that had been agreed to earlier; Cross border risk arising on account of the borrower being a resident of a country other than the country where the cross border asset is booked; Currency Risk, a possibility that exchange rate change, will alter the expected amount of principal and return on the lending or investment.

Your chief defense against systematic risk, as you'll see, is to build a portfolio that includes investments that react differently to the same economic factors. It's a strategy known as asset allocation. This generally involves investing in both bonds and stocks or the funds that own them, always holding some of each. That's because historical patterns show that when bonds as a groupthough not every bondare providing a strong return, stocks on the whole tend to provide a disappointing return. The reverse is also true. Bonds tend to provide strong returns, measured by the combination of change in value and investment earnings, when investor demand for them increases. That demand may be driven by concerns about volatility risk in the stock marketwhat's sometimes described as a flight to safety or by the potential for higher yield that results when interest rates increase, or by both factors occurring at the same time. That is, when investors believe they can benefit from good returns with less risk than they would be exposed to by owning stock, they are willing to pay more than par value to own

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bonds. In fact, they may sell stock to invest in bonds. The sale of stock combined with limited new buying drives stock prices down, reducing return. In a different phase of the cycle, those same investors might sell off bonds to buy stock, with just the opposite effect on stock and bond prices. If you owned both bonds and stocks in both periods, you would benefit from the strong returns on the asset class that was in greater demand at any one time. You would also be ready when investor sentiment changes and the other asset class provides stronger returns. To manage systematic risk, you can allocate your total investment portfolio so that it includes some stock and some bonds as well as some cash investments.

Nonsystematic Risk
Nonsystematic risk, in contrast to systematic risk, affects a much smaller number of companies or investments and is associated with investing in a particular product, company, or industry sector. Here are some examples of nonsystematic risk:

Credit risk, also called default risk, is the possibility that a bond issuer won't pay
interest as scheduled or repay the principal at maturity. Credit risk may also be a problem with insurance companies that sell annuity contracts, where your ability to collect the interest and income you expect is dependent on the claims-paying ability of the issuer.

Credit risk is defined as the possibility of losses associated with diminution in the credit quality of borrowers or counterparties. In a bank's portfolio, losses stem from outright default due to inability or unwillingness of a customer or counterparty to meet commitments in relation to lending, trading, settlement and other financial transactions. Alternatively, losses result from reduction in portfolio value arising from actual or perceived deterioration in credit quality. Credit risk emanates from a bank's dealings with an individual, corporate, bank, financial institution or a sovereign. Credit risk may take the following forms

In the case of direct lending: principal/and or interest amount may not be repaid; In the case of guarantees or letters of credit: funds may not be forthcoming from the constituents upon crystallization of the liability; In the case of treasury operations: the payment or series of payments due from the counter parties under the respective contracts may not be forthcoming or ceases; In the case of securities trading businesses: funds/ securities settlement may not be effected; In the case of cross-border exposure: the availability and free transfer of foreign currency funds may either cease or the sovereign may impose restrictions.

The real risk from credit is the deviation of portfolio performance from its expected value. Accordingly, credit risk is diversifiable, but difficult to eliminate completely. This is because

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a portion of the default risk may, in fact, result from the systematic risk outlined above. In addition, the idiosyncratic nature of some portion of these losses remains a problem for creditors in spite of the beneficial effect of diversification on total uncertainty. This is particularly true for banks that lend in local markets and ones that take on highly illiquid assets. In such cases, the credit risk is not easily transferred, and accurate estimates of loss are difficult to obtain.

Management risk: It also known as company risk, refers to the impact that bad
management decisions, other internal missteps, or even external situations can have on a company's performance and, as a consequence, on the value of investments in that company. Even if you research a company carefully before investing and it appears to have solid management, there is probably no way to know that a competitor is about to bring a superior product to market. Nor is it easy to anticipate a financial or personal scandal that undermines a company's image, its stock price, or the rating of its bonds. Always banks live with the risks arising out of human error, financial fraud and natural disasters. Exponential growth in the use of technology and increase in global financial inter-linkages are the two primary changes that contributed to such risks. Operational risk, though defined as any risk that is not categorized as market or credit risk, is the risk of loss arising from inadequate or failed internal processes, people and systems or from external events. In order to mitigate this, internal control and internal audit systems are used as the primary means. Risk education for familiarizing the complex operations at all levels of staff can also reduce operational risk. Insurance cover is one of the important mitigators of operational risk. Operational risk events are associated with weak links in internal control procedures. The key to management of operational risk lies in the banks ability to assess its process for vulnerability and establish controls as well as safeguards while providing for unanticipated worst-case scenarios. Operational risk involves breakdown in internal controls and corporate governance leading to error, fraud, performance failure, compromise on the interest of the bank resulting in financial loss. Putting in place proper corporate governance practices by itself would serve as an effective risk management tool. Bank should strive to promote a shared understanding of operational risk within the organization, especially since operational risk is often intertwined with market or credit risk and it is difficult to isolate. Operational strategic risk arises from environmental factors, such as a new competitor that changes the business paradigram, a major political and regulatory regime change, and earthquakes and other such factors that are outside the control of the firm. It also arises from major new strategic initiatives, such as developing a new line of business or reengineering an existing business line. All business rely on people, processes and technology outside their business unit, and the potential for failure exists there too, this type of risk is referred to as external dependency risk.

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Operational Risk

Operational failure risk (Internal operational risk) The risk encountered in pursuit of a particular strategy due to:

Operational strategic risk (External operational risk) The risk of choosing an inappropriate strategy in response to environmental factor, such as

People Process Technology

Political Taxation
Regulation Government Societal Competition, etc.

The figure above summarizes the

The figure above summarizes the relationship between operational failure risk and operational strategic risk. These two principal categories of risk are also sometimes defined as internal and external operational risk. One way to manage nonsystematic risk is to spread your investment dollars around, diversifying your portfolio holdings within each major asset classstock, bonds, and cash either by owning individual securities or mutual funds that invest in those securities. While you're likely to feel the impact of a company that crashes and burns, it should be much less traumatic if that company's stock is just one among several investors own. Other Investment Risks The investment decisions you makeand sometimes those you avoid makingcan expose Figure: Two Broad Categories of Operational Risk you to certain risks that can impede your progress toward meeting your investment goals. For example, buying and selling investments in your accounts too frequently, perhaps in an attempt to take advantage of short-term gains or avoid short-term losses, can increase your trading costs. The money you spend on trading reduces the balance in your account or eats into the amount you have to invest. If you decide to invest in something that's receiving a lot

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of media attention, you may be increasing the possibility that you're buying at the market peak, setting yourself up for future losses. Or, if you sell in a sudden market downturn, it can mean not only locking in your losses but also missing out on future gains. You can also increase your investment risk if you don't monitor the performance of your portfolio and make appropriate changes. For example, you should be aware of investments that have failed to live up to your expectations, and shed them when you determine that they are unlikely to improve, using the money from that sale for another investment.

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RISK MANAGEMENT IN BANKING SECTOR Risk Management is a systematic method of identifying, analyzing, assessing, rating, monitoring, controlling and communicating risks and uncertainty associated with any banks activity, function or process so as to avoid or minimize losses and maximize opportunities. The acceptance and management of financial risk is inherent to the business of banking and banks roles as financial intermediaries. It constitutes a central part and a discipline at the core of every banks strategic management, and encompasses all the activities and the portfolio of them that affect its risk and uncertainty profile. The better knowledge of risks and their impacts, the better decision-making for the banks activities is done. The understanding of the potential reaction of all those factors which can affect the organization increases the probability of success, and reduces both the probability of failure and the uncertainty of achieving the organizations overall objectives. Risk management does not aim at risk elimination, but enables the investors and organization to bring their risks to manageable proportions while not severely affecting their income. This balancing act between the risk levels and profits needs to be well-planned. Apart from bringing the risks and uncertainty to manageable proportions, they should also ensure that one risk does not get transformed into any other undesirable risk. This transformation takes place due to the inter-linkage present among the various risks. The focal point in managing any risk will be to understand the nature of the transaction in a way to unbundle the risks it is exposed to. Risk Management is a more mature subject in the western world. This is largely a result of lessons from major corporate failures, most telling and visible being the Barings collapse. In addition, regulatory requirements have been introduced, which expect organizations to have effective risk management practices. In India, whilst risk management is still in its infancy, there has been considerable debate on the need to introduce comprehensive risk management practices.

PROCESS OF RISK MANAGEMENT


To overcome the risk and to make banking function well, there is a need to manage all kinds of risks associated with the banking. Risk management becomes one of the main functions of any banking services risk management consists of identifying the risk and controlling them, means keeping the risk at acceptable level. These levels differ from institution to institution and country to country. The basic objective of risk management is to stakeholders; value by maximizing the profit and optimizing the capital funds for ensuring long term solvency of the banking organization. In the process of risk management following functions comprises:

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Risk origination: Credit risk, market risk, operation risk, etc

Risk identification: Identify and understand the risk. Describe the risk and analyze the risk.

Quantify the risk: Estimate the severity of risk.

Risk assessment and measurement: Assess the risk impact. Monitor and Review Measure the risk impact.

Accept Risk

Risk control: Risk mitigation plan through techniques. Generate scenerio to control.

Risk monitoring: Supervise risk, compare different investors scenarios, compliance with regulation follow up

Risk return trade off: Balancing risk with return.

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1. 2. 3. 4. 5. 6.

Identification: Quantify the risk Risk assessment and measurement Risk control Risk monitoring Risk return trade off

TOOLS AND TECHNIQUES FOR ASSESSING RISK AND UNCERTAINTY IN BANKING SECTOR

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