Measuring Risk in Banking:

• Perceived uncertainty connected with some event

1. Credit Risk:
• Indicators:
1. The ratio of nonperforming assets to total loans and leases.
2. The ratio of net charge-offs of loans to total loans and leases.
3. The ratio of ALL to total loans and leases or to equity capital.
4. The ratio of PLL to total loans or leases or equity capital.
• Nonperforming assets: due for 90 days or more.
• Charge-offs: worthless loans written off.
2. Liquidity Risk:
• Emergency funds with excessive cost.
• Rare event.
• Forces banks to issue negotiable CD’s at very high interest rates.
• Measures:
1. Purchased funds: Eurodollars, federal funds, RP’s, large CD’s
and commercial paper to total assets.
2. Net loans t total assets.
3. Cash and due from deposit balances held at other banks to total
assets.
4. Cash assets and government securities to total assets.

3. Market Risk:
• Interest rates and market value of bank-held bonds.
• Indicators:
1. The ratio of bank’s book value assets to the estimated
market value of those same assets.
2. The ratio of fixed rate loans and securities to floating-rate
loans and securities and of fixed rate liabilities to floating-
rate liabilities.
3. The ratio of book value equity capital to the market value
of a bank’s equity capital.
4. Interest Rate Risk:
• Movement of interest rates affecting margin of
revenues of operating costs.
• Interest expenses on borrowed money increase more
rapidly than interest revenues on loans and security
investments.
• Measures:
1. Ratio of ISA to ISL--- falling interest rates
ISA>ISL=losses.
2. The ratio of uninsured deposits to total deposits.
5. Earnings Risk:
• Net income after all expenses including taxes ---covered.
• External factors
• Internal factors
• Measures:
1. SD or Var of after tax net income.
2. SD or Var of ROE and ROA.
6. Solvency(or Default) Risk:
• Bankers must be directly concerned with risks to their
institutions long-run survival.
• Excessive bad loans, security portfolio decline in MV.
• Investors and depositors becoming aware.--- Regulators
declare bank insolvent.
• Stock price declines, borrowing costs rise
• Measures:
1. The interest rate spread between market yields on bank
debt issues (notes and CD’s)and the market yields on govt.
securities of the same maturity.
2. The ratio of a bank’s stock price to its annual earnings per
share.
3. The ratio of equity capital to total assets .
4. The ratio pf purchased funds to total liabilities.
5. ratio of equity capital to risk assets.
 6. primary capital to total assets. Includes all bank
reserves(to absorb losses) including equity capital,
ALL,minority investments in subsidiaries of the bank, and
long-term debt .

Inflation Risk:
Currency or Exchange rate Risk:
Political Risk:
Crime Risk: