The banking system is subject to various risks from "summary" of Economics of Money, Banking and Financial Markets, Business School by Frederic S. Mishkin
The banking system faces a range of risks that can impact its stability and operations. One key risk is credit risk, which arises from the possibility that borrowers may default on their loans. Banks must carefully assess the creditworthiness of borrowers and manage their loan portfolios to mitigate this risk. Another important risk is interest rate risk, which stems from fluctuations in interest rates. Banks with mismatched assets and liabilities are particularly vulnerable to interest rate changes, as they may find themselves earning less on their assets than they are paying on their liabilities. Liquidity risk is also a concern for banks, as it involves the possibility that a bank may not be able to meet its short-term obligations. Banks must ensure that they hold enough liquid assets to cover potential outflows of funds, such as customer withdrawals. Operational risk is another threat to the banking system, as it encompasses risks related to internal processes, systems, and personnel. Banks must have robust internal controls and risk management practices in place to mitigate operational risks. Market risk is yet another challenge for banks, as it involves the potential for losses due to fluctuations in market prices. Banks with large trading portfolios are especially exposed to market risk and must employ sophisticated risk management techniques to protect against adverse market movements. Finally, regulatory and legal risks can also impact banks, as changes in regulations or legal actions can have significant financial and reputational consequences. Banks must stay abreast of regulatory developments and ensure compliance with laws and regulations to mitigate these risks.- The banking system is subject to a variety of risks that require careful management and oversight. By identifying and addressing these risks effectively, banks can enhance their resilience and stability in the face of an uncertain and challenging operating environment.
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