The risks faced by Financial Institutions today
In banking terms, a risk is an event or occurrence that exposes the bank to an uncertain outcome and presents a potentially detrimental effect on the bank’s position in the market. In recent years changes have occurred in the banking industry that has prompted banks to reassess new risk factors.
Source of new risks facing Banking
- Introduction of new technology
- Changing customer needs and behavior
- Business model transformation
- Changing regulations and laws
Meeting the challenges of new risks in Banking.
One of the main factors that has affected the changes undergone by banks in the past few decades has been the introduction of digital banking methods. It has given rise to new competitors in the form of FinTech companies, start-ups, online banks and other new financial institutions. These new players in the financial world have made modern banking an even more complex environment.
The development of new complexities and risks in the financial industry means that banks have had to adjust their risk management systems. New technology, new regulations, new customer behavior, and new competitors have meant new risks for financial institutions. Banks have had to make a significant investment of resources to judge and resolve these risks. The role of chief risk and compliance officers has become even more critical with an increased need to monitor and manage risk factors and create and maintain a safe banking environment that can cope with the changes in the last few decades.
Risks Faced by Financial Institutions
Market Risk
When market prices change, there can be a risk of losses in on-or-off balance positions. The main components that affect market risk are:
- Interest Risk: losses due to interest rate fluctuation.
- Commodity Risk: losses on commodity investments due to a fluctuation in the price of commodities.
- Equity Risk: losses due to changing stock prices when a bank accepts equity as security for loans.
- Foreign Exchange Risk: losses due to fluctuation of exchange rates.
Compliance Risk
Financial institutions face repercussions if they fail to comply with laws, regulations and banking codes of conduct. The risk of noncompliance can result in legal or regulatory sanctions, a loss of reputation or financial losses. Banks need to be able to manage their legal documentation effectively, analyze and organize data efficiently. The bank’s infrastructure must ensure compliance with all laws, regulations and internal bank policies. Senior management can minimize these risks by enforcing compliance, and managing and educating employees on compliance policy across all sections of the financial institution.
Cybersecurity Risk
Breach of a bank’s private electronic information is one of the most common risks in IT. Financial institutions need to protect their electronic information and systems from damage, theft or misuse. Cybersecurity risks can come from within a bank or from external factors. Cybersecurity breaches can result from many bad habits. Typical examples are poor password practices, absence of separation of user privileges, lack of transaction controls, insufficient anti-virus protection, inadequate monitoring and reporting, improper server defense, and, most importantly, access to the system without the required permission or security checks.
Operational Risk
When there are inadequate or weak internal processes, systems, or staff, the result can be an operational risk. Banks face such risk daily in all sections of their organization. The operational risk can result from human error or acton, IT failure, internal software failure, or internal systems’ failure to transmit information and data accurately.
