Risk Management Essay Example | Topics and Well Written Essays - 1000 words

Risk Management - Essay ExampleThis paper will describe a risk context that may be faced by the top level administrator of a intrust while marketing it fiscal services. Risk contexts A bank executive ordinarily faces different types of risks once the bank deals with ranges of transactions and uses a large amount of leverage every day. When a banks financial position becomes weak, of course its depositors may withdraw their savings. Under much(prenominal) a difficult situation, the bank cannot sell debt securities in financial markets and this condition would worsen the banks financial state. For instance, the major cause of 2007-2009 credit crisis can be attributed to the fear of bank failure. According to Pyle (2007), although a bank executive may sh atomic number 18 many of the aforementioned(prenominal) risks of other organizations, the major risks that really trouble an executive ar liquidity risk, credit default risks, quest rate risks, and trading risks. Risk Identifica tion and summary 1. Liquidity risk In case of a bank, the term liquidity indicates its ability to pay bills and other payables, to punish bullion to a depositor, and to lend money to a borrower as part of banks credit policy. Hence, liquidity is the basic tool that is used to assess the financial viability of a bank. A bank executive faces great troubles while dealing with liquidity management because demands for funds are often unpredictable. Other off-balance sheet risks including give commitments, letters of credit, and derivatives also shew liquidity risks. A loan commitment indicates a line of credit that a bank issues on demand. Letters of credit are credit securities by which the bank guarantees that an importer will pay the exporter for imports or a commercial paper of bonds issuer will repay the principal. Finally, derivates are also an off balance sheet risk, which vie a crucial role in the collapse of American International Group (AIG). 2. Credit Default Risks Credi t default risk occurs when a borrower fails to repay the loan amount. In general practice, loans are written off after a period of 90 days of nonpayment. Law demands banks to maintain a loan loss reserves account to cover the losses arising from unpaid loans. A bank executive or manager has the responsibility to ensure that the borrower has submitted collateral securities that are adequate to cover his loan amount. In addition, the bank executive has the primary responsibility to recover the loan amount from the borrower. Therefore, bank executives would be liable to execute the board of directors when a loan goes unpaid. 3. Interest Rate Risks Banks usually pay lower interests on its liabilities such as deposits and borrowings and charge higher interests on their assets such as loans and securities. Hence, it is obvious that difference in these interest rates is the main source of profit for any bank. However, a banks terms of liabilities are usually different from its terms of as sets. In other words, interest rate paid on liabilities is highly subjected to short term rate fluctuations while interest rate earned on assets is fixed. Sometimes, the interest rate variation may cause the bank to pay more for its liabilities and thus reducing the banks profit rates. Under such circumstances, a bank executive faces interest rate risk. Since the interest rate fluctuations are unpredictable, often a bank executive f