Risk can be traced to the Latin word Rescum Risk is associated with uncertainty and reflected by way of change

on the fundamental/ basic

Reduction in firms value due to changes in business enviornment

 Danger

that a certain unpredictable contingency can occur, which generates randomness in cashflow Concentrates more on Systematic Risk

http://www.thehindubusinessline.com/features/investmentworld/article2783233.ece?ref=wl_companies

Credit risk is the potential for financial loss if a borrower or counterparty in a

transaction fails to meet its obligations.

Operational risk is the risk of loss resulting from inadequate or failed internal

processes, people and systems or from external events.

Liquidity risk relates to the banks ability to meet its continuing obligations, including financing its assets.

Systematic risk is the risk of asset value change associated with systematic factors. It is sometimes
referred to as market risk, which is in fact a

somewhat imprecise term. By its nature, this risk can

be hedged, but cannot be diversified completely
away. In fact, systematic risk can be thought of as undiversifiable risk.

Market risk is the potential for loss from changes in the value of financial instruments. The value of a financial instrument can be affected by changes in:

Interest rates; Foreign exchange rates; Equity and commodity prices; Credit spreads.

Interest rate risk is the potential loss due to movements in interest rates.

This risk arises because bank assets (loans and bonds) usually have a
significantly longer maturity than bank liabilities (deposits). This risk can be conceptualized in two ways. First, if interest rates rise, the value of the longer term assets will tend to fall more than the value of the shorter-term liabilities, reducing the banks equity.

Second, if interest rates rise, the bank will be forced to pay higher interest rates on its deposits well before its longer term loans mature and it is able to replace those loans with loans that earn higher interest rates.

Foreign exchange risk is the risk that the value of

the banks assets or liabilities changes due to

currency exchange rate fluctuations.

Banks buy and sell foreign exchange on behalf of their customers (who need foreign currency to pay for their international transactions or receive

foreign currency and want to exchange it to their

own currency) or for the banks own accounts.

Commodity risk is the potential loss due to an

adverse change in commodity prices.

There

are

different

types

of

commodities,

including agricultural commodities (e.g., wheat,

corn,

soybeans),
and

industrial
energy

commodities
(e.g.,

(e.g.,metals),

commodities

natural gas, crude oil). The value of commodities fluctuates a great deal due to changes in demand and supply.

Performance risk exists when the transaction risk depends more on how the borrower performs for specific projects or operations than on its overall credit

standing.

Performance risk appears notably when dealing with commodities. As long as delivery of commodities occurs, what the borrower does has little importance.

Performance risk is transactional because it relates to a specific transaction.

Moreover, commodities shift from one owner to another during transportation. The
lender is at risk with each one of them sequentially.

Risk remains more transaction-related than related to the various owners because the commodity value backs the transaction. Sometimes, oil is a major export, which

becomes even more strategic in the event of an economic crisis, making the
financing of the commodity immune to country risk.

Solvency risk is the risk of being unable to absorb losses, generated by all types of risks, with the available capital. Solvency risk is equivalent to the default risk of the bank. Solvency is a joint outcome of available capital and of all risks. The basic principle of capital adequacy, promoted by regulators, is to define what level of capital allows a bank to sustain the potential losses arising from all current risks and complying with an acceptable solvency level.

Business Risk derives from a reduction of margins not due to market, credit or operational risks, but to changes in the competitive environment and in customer behavior. Specifically, it mainly concerns future changes in margins and their impact on the Group's value and capitalization levels.

Real estate risk comprises potential losses from adverse fluctuations in the market value of the real estate portfolio owned by the Group.

Customers' properties subject to mortgage and leased property are not included.

Reputational risk is the current or future risk of a decline in profits as a result of a negative perception of the bank's image by customers,

counterparties, bank shareholders, investors

or the regulator.

Strategic risk arises from unexpected changes in the competitive environment, from the failure to

recognize ongoing trends in the banking sector or

from making incorrect conclusions regarding these

trends. The impacts of decisions that are detrimental to long-term objectives and that may be difficult to reverse are also considered.

Legal risks are endemic in financial contracting and are separate from the legal ramifications of credit, counterparty, and operational risks.
For example, environmental regulations have radically affected real estate values for older properties and imposed serious risks to lending institutions in this area.

A second type of legal risk arises from the activities of an institution's management or employees. Fraud, violations of regulations or laws, and other actions can lead to catastrophic loss.

Sovereign risk, which is the risk of default of sovereign issuers, such as central banks or government sponsored banks. The risk of default often refers to that of debt restructuring for countries. A deterioration of the economic conditions. This might lead to a deterioration of the credit standing of local obligors, beyond what it should be under normal conditions. Indeed, firms default frequencies increase when economic conditions deteriorate. A deterioration of the value of the local foreign currency in terms of the banks base currency. The impossibility of transferring funds from the country, either because there are legal restrictions imposed locally or because the currency is not convertible any more. Convertibility or transfer risks are common and restrictive definitions of country risks. A market crisis triggering large losses for those holding exposures in the local markets.

Model risk is significant in the market universe, which traditionally makes relatively intensive usage of models for pricing purposes. Model risk is growing more important, with the extension of modelling techniques to other risks, notably credit risk, where scarcity of data remains a major obstacle for testing the reliability of inputs and models. The model used to predict the relationship may not be accurate due to the variables considered and assumptions made.

VERTICAL
TOP DOWN BOTTOM UP

HORIZONTAL

ALM is the unit in charge of managing the interest ra The ALM Committee (ALCO)
is in charge of implementing ALM decisions, The ALCO agenda includes global balance sheet management and the guidelines for making the business lines policy consistent with the global policy.

 Standard

prices Standard deviation of net income Standard deviation of ROE and ROA

deviation of stock

The ratio of non performing assets(past due 90 days or more) to total loans and leases The ratio net charge offs(worthless and written off) of loans to total loans and leases The ratio of annual provision for loan losses to total loans and leases or to equity capital. The ratio of non performing assets to equity capital Total loans to total deposit ratio

 Cash

and due from balances held at other depository institutions to total assets Cash assets and government securities to total assets.

The ratio of book value of the asset to the estimated market value of those same assets The ratio of book value of the equity to the market value of the equity capital The market value of the common and preferred stock per share reflecting investor perception of financial institution risk.

 The

ratio of interest sensitive assets to interest sensitive liabilities

IS Assets > IS Liabilities risk when interest rate falls and vice versa if IS Liabilities > IS Assets

Interest rate spread between market yield on debt issues and market yield on government securities of the same maturity.
Risk if increase in spread

Ratio of stock price per share to EPS.

Risk if ratio falls

The ratio of equity capital to total assets.

Decrease in equity funding risk for the shareholders and debtors