Risk Management of Banks in 2019 – Full Picture
Today’s financial world is highly volatile. In the financial sector, the players operate under high risk and uncertainty. Besides, there are numerous regulatory norms the financial institutions and banks must adhere to.
Risks faced by banks presently:
Let us see what risks are faced by banks presently:
- Credit risk: The risk of the borrower not meeting his obligations as per terms and conditions. Banks charge a high rate of interest for borrowers who belong to the high-risk category like low income, low credit score etc.
- Market risk: The risk due to market fluctuations like interest rate fluctuation, stock price fluctuation, currency risk fluctuation, and commodity prices fluctuation.
- Operational risk: When people are involved there is always the risk of human error. That’s why the automated trading robot is used in apps like bitcoin code. But in the banking industry, there is a risk due to human errors, system failure, and errors in processing
- 4. Liquidity risk: The risk of non-availability of liquid assets especially cash is a major risk in the banking industry.
- 5. Reputational risk: Loss of reputation results in loss of trust of customers.
- Business risk: Lack of long-term planning can lead to low profits. All risks associated with the lack of planning is a business risk which can hamper the earnings of the bank.
- 7. Systematic risk: When a risk leads to the downfall of various banks in the banking industry it is called systematic risk. It does not affect any single entity but affects the industry as a whole.
- Moral hazard: When the bank lends assuming the unreasonable risk and some other organization bears the cost of the result, it is called a moral hazard.
Risk Management in 2019:
Risk management of banks in 2019 will be in line with the following points:
- The proposed changes as per Basel IV norms will impact the risk management methods of banks.
- Governments have proposed to exercise more pressure on banks to crackdown money laundering, fraud, terrorism financing etc.
- The changing technology has invited fintech companies to convert themselves to fintech banks. This will tighten the competition. Banks must prepare themselves for providing equivalent technology. They must equip themselves with new concepts like crowdsourcing, big data, machine learning algorithm etc. Hence related errors and failures lead to risk.
- Cybersecurity threats cannot be avoided. With the vast development in communication, negative sentiments spread fast in the market through the internet.
Hence banks must create an excellent pool of talent to handle all the above issues.