Financial risk management involves identifying risks, measuring them, and developing plans to address risks, particularly credit risk and market risk. It focuses on when and how to hedge risks using financial instruments. Common risk management techniques across financial firms include independent risk assessments, controls on risk taking, and hedging risks with derivatives or reinsurance. While techniques are similar, firms focus more on risks dominant in their primary business lines, with commercial banks most concerned with credit and funding risks, securities firms with market risk, and insurers with ensuring adequate technical provisions.
A new emphasis on enterprise risk management from regulators has heightened awareness among bankers to get educated and adopt these best practices at their institution. In response to this increased focus, the RMA ERM Council developed the ERM framework and associated competencies, which became the foundation for a series of highly practical workbooks for implementing effective ERM.
A comprehensive presentation on the financial risks involved in businesses in general & specifically in banks.
What is Risk?
Generally - Danger, Hazard, Adverse impact, Fear of loss.
Financially-Loss of earnings/capital
May result in incapability of financial institution to meet business goals
Basically there are 4 main risks:
1. Credit Risk
2. Market Risk
3. Liquidity Risk
4. Operational Risk
A new emphasis on enterprise risk management from regulators has heightened awareness among bankers to get educated and adopt these best practices at their institution. In response to this increased focus, the RMA ERM Council developed the ERM framework and associated competencies, which became the foundation for a series of highly practical workbooks for implementing effective ERM.
A comprehensive presentation on the financial risks involved in businesses in general & specifically in banks.
What is Risk?
Generally - Danger, Hazard, Adverse impact, Fear of loss.
Financially-Loss of earnings/capital
May result in incapability of financial institution to meet business goals
Basically there are 4 main risks:
1. Credit Risk
2. Market Risk
3. Liquidity Risk
4. Operational Risk
A brief overview of financial risk management strategies which will be covered in a 2 day workshop on Emerging Markets Investment & Risk Management Strategies on Sept 15-16 2011 in Singapore.
How often have you wondered, “what else can go wrong and how are all the risks interconnected?” Developing a risk governance program, a stress testing and scenario analysis program, as well as a risk appetite statement, can help you build an effective, proactive risk management strategy and enhance the risk culture of your institution.
RMA's Risk Appetite Workbook is a practical guide to understanding and developing a risk appetite statement that is appropriate for your bank. Also available are workbooks on Scenario Analysis & Stress Testing for Community Banks, and Governance & Policies.
A brief introduction to Linux Containers and explanation of the available Minimalist OSes targeted to run containers.
* http://www.meetup.com/Arapiraca-Dev-Meetup/events/222709815/
* http://www.meetup.com/maceio-dev-meetup/events/222550701/
* https://www.youtube.com/watch?v=i4sO-W7ack8
A brief overview of financial risk management strategies which will be covered in a 2 day workshop on Emerging Markets Investment & Risk Management Strategies on Sept 15-16 2011 in Singapore.
How often have you wondered, “what else can go wrong and how are all the risks interconnected?” Developing a risk governance program, a stress testing and scenario analysis program, as well as a risk appetite statement, can help you build an effective, proactive risk management strategy and enhance the risk culture of your institution.
RMA's Risk Appetite Workbook is a practical guide to understanding and developing a risk appetite statement that is appropriate for your bank. Also available are workbooks on Scenario Analysis & Stress Testing for Community Banks, and Governance & Policies.
A brief introduction to Linux Containers and explanation of the available Minimalist OSes targeted to run containers.
* http://www.meetup.com/Arapiraca-Dev-Meetup/events/222709815/
* http://www.meetup.com/maceio-dev-meetup/events/222550701/
* https://www.youtube.com/watch?v=i4sO-W7ack8
Risk management is the process of identifying, assessing and controlling threats to an organization's capital and earnings. These threats, or risks, could stem from a wide variety of sources, including financial uncertainty, legal liabilities, strategic management errors, accidents and natural disasters
Risks which are not capable of avoidance, prevention, reduction to a large extent or assumption may be transferred from one party to the other party. The basic objective of insurance is to transfer the risk of a person to the insurance company which has easily spread it over a large number of persons insuring similar risks. As such, for handling risks which involve large financial losses or which are dangerous, insurance is a means of shifting such risks in consideration of a nominal cost called premium.
Abstract: Risk management is an activity which integrates recognition of risk, risk assessment, developing strategies to manage it, and mitigation of risk using managerial resources. Some traditional risk managements are focused on risks stemming from physical or legal causes (e.g. natural disasters or fires, accidents, death). Financial risk management, on the other hand, focuses on risks that can be managed using traded financial instruments. Objective of risk management is to reduce different risks related to a pre-selected domain to an acceptable. It may refer to numerous types of threats caused by environment, technology, humans, organizations and politics. The paper describes the different steps in the risk management process which methods are used in the different steps, and provides some examples for risk and safety management.
Risk management in the investment banking industry involves proactive risk management strategies and other mitigation systems to avoid surprises in the business. Learn more here.
Mastering Risk- A Comprehensive Guide to Factoring Risk Management.pptxM1NXT
Risk and capital treatment in factoring transactions is a prevalent practice in both domestic and international trade within supply chain finance. In this transaction, a financial entity, known as the factor, purchases trade accounts receivable from a supplier at a discounted rate.
Visit: https://m1nxt.blogspot.com/2024/01/mastering-risk-comprehensive-guide-to.html
Personal finance[edit]Main article Personal financeQues.docxbartholomeocoombs
Personal finance
[
edit
]
Main article:
Personal finance
Questions in personal finance revolve around:
Protection against unforeseen personal events, as well as events in the wider economies
Transference of family wealth across generations (bequests and inheritance)
Effects of tax policies (tax subsidies or penalties) on management of personal finances
Effects of credit on individual financial standing
Development of a savings plan or financing for large purchases (auto, education, home)
Planning a secure financial future in an environment of economic instability
Warren Buffett
is an American investor, business magnate, and philanthropist. He is considered by some to be one of the most successful investors in the world.
Personal finance may involve paying for education, financing
durable goods
such as
real estate
and cars, buying
insurance
, e.g. health and property insurance, investing and saving for
retirement
.
Personal finance may also involve paying for a loan, or debt obligations. The six key areas of personal financial planning, as suggested by the Financial Planning Standards Board, are:
[1]
Financial position
: is concerned with understanding the personal resources available by examining net worth and household cash flow. Net worth is a person's balance sheet, calculated by adding up all assets under that person's control, minus all liabilities of the household, at one point in time. Household cash flow totals up all the expected sources of income within a year, minus all expected expenses within the same year. From this analysis, the financial planner can determine to what degree and in what time the personal goals can be accomplished.
Adequate protection
: the analysis of how to protect a household from unforeseen risks. These risks can be divided into the following: liability, property, death, disability, health and long term care. Some of these risks may be self-insurable, while most will require the purchase of an insurance contract. Determining how much insurance to get, at the most cost effective terms requires knowledge of the market for personal insurance. Business owners, professionals, athletes and entertainers require specialized insurance professionals to adequately protect themselves. Since insurance also enjoys some tax benefits, utilizing insurance investment products may be a critical piece of the overall investment planning.
Tax planning
: typically the income tax is the single largest expense in a household. Managing taxes is not a question of if you will pay taxes, but when and how much. Government gives many incentives in the form of tax deductions and credits, which can be used to reduce the lifetime tax burden. Most modern governments use a progressive tax. Typically, as one's income grows, a higher
marginal rate of tax
must be paid. Understanding how to take advantage of the myriad tax breaks when planning one's personal finances can make a significant impact in which it can later save you money in .
US Economic Outlook - Being Decided - M Capital Group August 2021.pdfpchutichetpong
The U.S. economy is continuing its impressive recovery from the COVID-19 pandemic and not slowing down despite re-occurring bumps. The U.S. savings rate reached its highest ever recorded level at 34% in April 2020 and Americans seem ready to spend. The sectors that had been hurt the most by the pandemic specifically reduced consumer spending, like retail, leisure, hospitality, and travel, are now experiencing massive growth in revenue and job openings.
Could this growth lead to a “Roaring Twenties”? As quickly as the U.S. economy contracted, experiencing a 9.1% drop in economic output relative to the business cycle in Q2 2020, the largest in recorded history, it has rebounded beyond expectations. This surprising growth seems to be fueled by the U.S. government’s aggressive fiscal and monetary policies, and an increase in consumer spending as mobility restrictions are lifted. Unemployment rates between June 2020 and June 2021 decreased by 5.2%, while the demand for labor is increasing, coupled with increasing wages to incentivize Americans to rejoin the labor force. Schools and businesses are expected to fully reopen soon. In parallel, vaccination rates across the country and the world continue to rise, with full vaccination rates of 50% and 14.8% respectively.
However, it is not completely smooth sailing from here. According to M Capital Group, the main risks that threaten the continued growth of the U.S. economy are inflation, unsettled trade relations, and another wave of Covid-19 mutations that could shut down the world again. Have we learned from the past year of COVID-19 and adapted our economy accordingly?
“In order for the U.S. economy to continue growing, whether there is another wave or not, the U.S. needs to focus on diversifying supply chains, supporting business investment, and maintaining consumer spending,” says Grace Feeley, a research analyst at M Capital Group.
While the economic indicators are positive, the risks are coming closer to manifesting and threatening such growth. The new variants spreading throughout the world, Delta, Lambda, and Gamma, are vaccine-resistant and muddy the predictions made about the economy and health of the country. These variants bring back the feeling of uncertainty that has wreaked havoc not only on the stock market but the mindset of people around the world. MCG provides unique insight on how to mitigate these risks to possibly ensure a bright economic future.
The European Unemployment Puzzle: implications from population agingGRAPE
We study the link between the evolving age structure of the working population and unemployment. We build a large new Keynesian OLG model with a realistic age structure, labor market frictions, sticky prices, and aggregate shocks. Once calibrated to the European economy, we quantify the extent to which demographic changes over the last three decades have contributed to the decline of the unemployment rate. Our findings yield important implications for the future evolution of unemployment given the anticipated further aging of the working population in Europe. We also quantify the implications for optimal monetary policy: lowering inflation volatility becomes less costly in terms of GDP and unemployment volatility, which hints that optimal monetary policy may be more hawkish in an aging society. Finally, our results also propose a partial reversal of the European-US unemployment puzzle due to the fact that the share of young workers is expected to remain robust in the US.
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
how to sell pi coins on Bitmart crypto exchangeDOT TECH
Yes. Pi network coins can be exchanged but not on bitmart exchange. Because pi network is still in the enclosed mainnet. The only way pioneers are able to trade pi coins is by reselling the pi coins to pi verified merchants.
A verified merchant is someone who buys pi network coins and resell it to exchanges looking forward to hold till mainnet launch.
I will leave the telegram contact of my personal pi merchant to trade with.
@Pi_vendor_247
how can I sell my pi coins for cash in a pi APPDOT TECH
You can't sell your pi coins in the pi network app. because it is not listed yet on any exchange.
The only way you can sell is by trading your pi coins with an investor (a person looking forward to hold massive amounts of pi coins before mainnet launch) .
You don't need to meet the investor directly all the trades are done with a pi vendor/merchant (a person that buys the pi coins from miners and resell it to investors)
I Will leave The telegram contact of my personal pi vendor, if you are finding a legitimate one.
@Pi_vendor_247
#pi network
#pi coins
#money
Currently pi network is not tradable on binance or any other exchange because we are still in the enclosed mainnet.
Right now the only way to sell pi coins is by trading with a verified merchant.
What is a pi merchant?
A pi merchant is someone verified by pi network team and allowed to barter pi coins for goods and services.
Since pi network is not doing any pre-sale The only way exchanges like binance/huobi or crypto whales can get pi is by buying from miners. And a merchant stands in between the exchanges and the miners.
I will leave the telegram contact of my personal pi merchant. I and my friends has traded more than 6000pi coins successfully
Tele-gram
@Pi_vendor_247
Resume
• Real GDP growth slowed down due to problems with access to electricity caused by the destruction of manoeuvrable electricity generation by Russian drones and missiles.
• Exports and imports continued growing due to better logistics through the Ukrainian sea corridor and road. Polish farmers and drivers stopped blocking borders at the end of April.
• In April, both the Tax and Customs Services over-executed the revenue plan. Moreover, the NBU transferred twice the planned profit to the budget.
• The European side approved the Ukraine Plan, which the government adopted to determine indicators for the Ukraine Facility. That approval will allow Ukraine to receive a EUR 1.9 bn loan from the EU in May. At the same time, the EU provided Ukraine with a EUR 1.5 bn loan in April, as the government fulfilled five indicators under the Ukraine Plan.
• The USA has finally approved an aid package for Ukraine, which includes USD 7.8 bn of budget support; however, the conditions and timing of the assistance are still unknown.
• As in March, annual consumer inflation amounted to 3.2% yoy in April.
• At the April monetary policy meeting, the NBU again reduced the key policy rate from 14.5% to 13.5% per annum.
• Over the past four weeks, the hryvnia exchange rate has stabilized in the UAH 39-40 per USD range.
how to sell pi coins in South Korea profitably.DOT TECH
Yes. You can sell your pi network coins in South Korea or any other country, by finding a verified pi merchant
What is a verified pi merchant?
Since pi network is not launched yet on any exchange, the only way you can sell pi coins is by selling to a verified pi merchant, and this is because pi network is not launched yet on any exchange and no pre-sale or ico offerings Is done on pi.
Since there is no pre-sale, the only way exchanges can get pi is by buying from miners. So a pi merchant facilitates these transactions by acting as a bridge for both transactions.
How can i find a pi vendor/merchant?
Well for those who haven't traded with a pi merchant or who don't already have one. I will leave the telegram id of my personal pi merchant who i trade pi with.
Tele gram: @Pi_vendor_247
#pi #sell #nigeria #pinetwork #picoins #sellpi #Nigerian #tradepi #pinetworkcoins #sellmypi
Latino Buying Power - May 2024 Presentation for Latino CaucusDanay Escanaverino
Unlock the potential of Latino Buying Power with this in-depth SlideShare presentation. Explore how the Latino consumer market is transforming the American economy, driven by their significant buying power, entrepreneurial contributions, and growing influence across various sectors.
**Key Sections Covered:**
1. **Economic Impact:** Understand the profound economic impact of Latino consumers on the U.S. economy. Discover how their increasing purchasing power is fueling growth in key industries and contributing to national economic prosperity.
2. **Buying Power:** Dive into detailed analyses of Latino buying power, including its growth trends, key drivers, and projections for the future. Learn how this influential group’s spending habits are shaping market dynamics and creating opportunities for businesses.
3. **Entrepreneurial Contributions:** Explore the entrepreneurial spirit within the Latino community. Examine how Latino-owned businesses are thriving and contributing to job creation, innovation, and economic diversification.
4. **Workforce Statistics:** Gain insights into the role of Latino workers in the American labor market. Review statistics on employment rates, occupational distribution, and the economic contributions of Latino professionals across various industries.
5. **Media Consumption:** Understand the media consumption habits of Latino audiences. Discover their preferences for digital platforms, television, radio, and social media. Learn how these consumption patterns are influencing advertising strategies and media content.
6. **Education:** Examine the educational achievements and challenges within the Latino community. Review statistics on enrollment, graduation rates, and fields of study. Understand the implications of education on economic mobility and workforce readiness.
7. **Home Ownership:** Explore trends in Latino home ownership. Understand the factors driving home buying decisions, the challenges faced by Latino homeowners, and the impact of home ownership on community stability and economic growth.
This SlideShare provides valuable insights for marketers, business owners, policymakers, and anyone interested in the economic influence of the Latino community. By understanding the various facets of Latino buying power, you can effectively engage with this dynamic and growing market segment.
Equip yourself with the knowledge to leverage Latino buying power, tap into their entrepreneurial spirit, and connect with their unique cultural and consumer preferences. Drive your business success by embracing the economic potential of Latino consumers.
**Keywords:** Latino buying power, economic impact, entrepreneurial contributions, workforce statistics, media consumption, education, home ownership, Latino market, Hispanic buying power, Latino purchasing power.
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what is the future of Pi Network currency.DOT TECH
The future of the Pi cryptocurrency is uncertain, and its success will depend on several factors. Pi is a relatively new cryptocurrency that aims to be user-friendly and accessible to a wide audience. Here are a few key considerations for its future:
Message: @Pi_vendor_247 on telegram if u want to sell PI COINS.
1. Mainnet Launch: As of my last knowledge update in January 2022, Pi was still in the testnet phase. Its success will depend on a successful transition to a mainnet, where actual transactions can take place.
2. User Adoption: Pi's success will be closely tied to user adoption. The more users who join the network and actively participate, the stronger the ecosystem can become.
3. Utility and Use Cases: For a cryptocurrency to thrive, it must offer utility and practical use cases. The Pi team has talked about various applications, including peer-to-peer transactions, smart contracts, and more. The development and implementation of these features will be essential.
4. Regulatory Environment: The regulatory environment for cryptocurrencies is evolving globally. How Pi navigates and complies with regulations in various jurisdictions will significantly impact its future.
5. Technology Development: The Pi network must continue to develop and improve its technology, security, and scalability to compete with established cryptocurrencies.
6. Community Engagement: The Pi community plays a critical role in its future. Engaged users can help build trust and grow the network.
7. Monetization and Sustainability: The Pi team's monetization strategy, such as fees, partnerships, or other revenue sources, will affect its long-term sustainability.
It's essential to approach Pi or any new cryptocurrency with caution and conduct due diligence. Cryptocurrency investments involve risks, and potential rewards can be uncertain. The success and future of Pi will depend on the collective efforts of its team, community, and the broader cryptocurrency market dynamics. It's advisable to stay updated on Pi's development and follow any updates from the official Pi Network website or announcements from the team.
how to sell pi coins in all Africa Countries.DOT TECH
Yes. You can sell your pi network for other cryptocurrencies like Bitcoin, usdt , Ethereum and other currencies And this is done easily with the help from a pi merchant.
What is a pi merchant ?
Since pi is not launched yet in any exchange. The only way you can sell right now is through merchants.
A verified Pi merchant is someone who buys pi network coins from miners and resell them to investors looking forward to hold massive quantities of pi coins before mainnet launch in 2026.
I will leave the telegram contact of my personal pi merchant to trade with.
@Pi_vendor_247
1. Financial Risk Management
Financial risk management is the practice of creating economic value in a firm by using
financial instruments to manage exposure to risk, particularly credit risk and market risk. Other
types include Foreign exchange, Shape, Volatility, Sector, Liquidity, Inflation risks, etc. Similar
to general risk management, financial risk management requires identifying its sources,
measuring it, and plans to address them.
Financial risk management can be qualitative and quantitative. As a specialization of risk
management, financial risk management focuses on when and how to hedge using financial
instruments to manage costly exposures to risk.
What is risk management?
Risk management ensures that an organization identifies and understands the risks to which it is
exposed. Risk management also guarantees that the organization creates and implements an
effective plan to prevent losses or reduce the impact if a loss occurs.
A risk management plan includes strategies and techniques for recognizing and confronting these
threats. Good risk management doesn’t have to be expensive or time consuming; it may be as
uncomplicated as answering these three questions:
1. What can go wrong?
2. What will we do, both to prevent the harm from occurring and in response to the harm or
loss?
3. If something happens, how will we pay for it?
Common risk categories
Financial firms face four common risks: market risk, credit risk, funding risk, and
operational risk. Market risk refers to the possibility of incurring large losses from
adverse changes in financial asset prices, such as stock prices or interest rates. Standard
risk management involves the use of statistical models to forecast the probabilities and
magnitudes of large adverse price changes. These so-called "value-at-risk" models are
used to set capital against potential losses. In practice, while models provide a convenient
methodology for quantifying market risks, there are limitations to their ability to predict
the magnitude of potential losses. To address these limitations, firms also use stress tests
that examine the impact of large hypothetical market movements on their portfolio
values.
Credit risk is the risk that a firm's borrowers will not repay their debt obligations in full
when they are due. The traditional method for managing credit risk is to establish credit
limits at the level of the individual borrower, industry sector, and geographic area. Such
limits are generally based on internal credit ratings. Quantitative models are increasingly
used to measure and manage credit risks, for further discussion).
Funding (or liquidity) risk is the risk that a firm cannot obtain the funds necessary to meet
its financial obligations, for example short-term loan commitments. Three common
1
2. techniques for mitigating funding risk are diversifying over funding sources, holding
liquid assets, and establishing contingency plans, such as backup lines of credit.
Generally, firms set funding goals as benchmarks to measure their current funding levels,
and take mitigating actions when they are below certain thresholds.
Finally, operational risk is the risk of monetary loss resulting from inadequate or failed
internal processes, people, and systems or from external events, for a more complete
discussion). Although operational risk management is a rapidly developing field, standard
risk mitigation techniques have not yet been developed.
Common risk management techniques
A key element of financial risk management is deciding which risks to bear and to what
degree. Indeed, a financial firm's value-added is often its willingness to take on specific
risks. Correspondingly, risk management involves determining what risks a firm's
financial activities generate and avoiding unprofitable risk positions. Other important
components are deciding how best to bear the desired risks and what actions are needed
to mitigate undesired risks by shifting them to third parties.
Financial firms protect themselves from risk by setting aside funds to cover losses.
Broadly speaking, these funds are known as provisions and capital. Provisions are funds
set aside to cover expected (or average) losses, and capital refers to funds set aside to
cover unexpected (or extraordinary) losses. Capital takes several forms on the balance
sheets of financial firms, but typically it includes such items as shareholder equity. The
reliance on provisions and capital varies among financial firms engaging in banking,
securities, and insurance activities due to differences in their underlying risks.
Since financial firms have similar general goals regarding risk bearing, some of their risk
management techniques are similar. For example, all firms have procedures to ensure that
independent risk assessments are conducted and that controls are in place to limit the
amount of risk individual business units take. In addition, hedging—i.e., paying third
parties to take on some of the risk exposure—is common to all types of financial
activities. Market risk is the easiest to hedge, because of the wide variety of exchange-
traded and over-the-counter derivatives available. Increasingly, credit risk is hedged
using credit derivatives, which are over-the-counter derivatives for which payments are
based on borrower credit quality. Finally, certain risk exposures arising from insurance
activities can be hedged using the reinsurance market.
At the same time, important differences in risk management techniques exist. As noted in
the 2001 report by the Joint Forum consisting of international bank, securities, and
insurance supervisors, financial firms tend to invest more in developing risk management
techniques for the risks that are dominant in their primary business lines. The report also
found that risk management still is conducted mainly on the basis of specific business
lines. The following sections highlight the key differences in risk management techniques
across financial activities.
Benefits to managing risk
Risk management provides a clear and structured approach to identifying risks. Having a clear
understanding of all risks allows an organization to measure and prioritize them and take the
2
3. appropriate actions to reduce losses. Risk management has other benefits for an organization,
including:
Saving resources: Time, assets, income, property and people are all valuable resources
that can be saved if fewer claims occur.
Protecting the reputation and public image of the organization.
Preventing or reducing legal liability and increasing the stability of operations.
Protecting people from harm.
Protecting the environment.
Enhancing the ability to prepare for various circumstances.
Reducing liabilities.
Assisting in clearly defining insurance needs.
An effective risk management practice does not eliminate risks. However, having an effective
and operational risk management practice shows an insurer that your organization is committed
to loss reduction or prevention. It makes your organization a better risk to insure.
Role of insurance in risk management
Insurance is a valuable risk-financing tool. Few organizations have the reserves or funds
necessary to take on the risk themselves and pay the total costs following a loss. Purchasing
insurance, however, is not risk management. A thorough and thoughtful risk management plan is
the commitment to prevent harm. Risk management also addresses many risks that are not
insurable, including brand integrity, potential loss of tax-exempt status for volunteer groups,
public goodwill and continuing donor support.
Why manage your risk?
An organization should have a risk management strategy because:
People are now more likely to sue. Taking the steps to reduce injuries could help in
defending against a claim.
Courts are often sympathetic to injured claimants and give them the benefit of the doubt.
Organizations and individuals are held to very high standards of care.
People are more aware of the level of service to expect, and the recourse they can take if
they have been wronged.
Organizations are being held liable for the actions of their employees/volunteers.
Organizations are perceived as having a lot of assets and/or high insurance policy limits.
What are the consequences of not managing risk?
1. Injuries or fatalities
2. Financial loss and damage to share price
3. Long-term reputation damage
4. Product or service boycott
5. Problems with activists or NGOs
6. Imposition of harsh regulation and laws
3
4. 7. Legal payouts
Ways of minimizing the effects of uncertainty
• Implementing risk audits
• Encouraging all employees in understanding risk
• Use of probability assessments
• Understanding the difference between relative risk, propensities and frequency
• Use of decision tress
• Use of sensitivity analysis
Financial risks of commercial banking
A defining characteristic of commercial banking is extending credit to borrowers of all
types. Hence, commercial banks' main risks are the credit risk arising from their lending
activities and the funding risk related to the structure of their balance sheets. Banks hold
loan loss provisions to cover expected losses, but capital to cover unexpected credit
accounts for a larger share of the balance sheet. Banks are required to hold minimum
levels of regulatory capital, and bank regulators in most countries adhere to the 1998
Basel Capital Accord. As mentioned, credit risk management is placing greater emphasis
on producing detailed quantitative estimates of credit risk. These measures are used to
form better estimates of the amount of provisions and capital necessary at the portfolio
level and to price and trade individual credits; in addition, they would be used for
regulatory capital purposes under proposed changes to the Basel Capital Accord.
Commercial banks are particularly vulnerable to funding risk because they finance
illiquid longer-term lending commitments with short-term liabilities, such as deposits.
Broadly speaking, funding risk management consists of an assessment of potential
demands for liquidity during a stressful period relative to the potential sources of
liquidity. To avoid a shortfall, banks seek to expand the size and number of available
sources, for example, the interbank market. In the United States, banks also have access
to the Federal Reserve discount window.
Financial risks of securities activities
Securities firms engage in various financial activities, but key among these are serving as
brokers between two parties in transfers of financial securities and as dealers and
underwriters of these securities. The degree to which individual securities firms engage in
these activities varies widely. In general, a large share of securities firms' assets are fully
collateralized receivables arising from securities borrowed and reverse repurchase
transactions with other market participants. Another asset category is securities they own,
including positions related to derivative transactions. The main risk arising from
securities activities is the market risk associated with proprietary holdings and collateral
obtained or provided for specific transactions. Securities firms generally do not maintain
4
5. significant provisions because their assets and liabilities can be valued accurately on a
mark-to-market basis. Hence, hedging techniques and capital play dominant roles in risk
management for securities firms.
With respect to credit risk, securities activities generate fewer credit exposures than
commercial bank lending. With fully secured transactions, securities firms mitigate their
credit risk exposures by monitoring them with respect to the value of the collateral
received. For partially secured or unsecured transactions, such as funds owed by
counterparties in derivative transactions, they mitigate credit risk by increasing or
imposing collateral requirements when the creditworthiness of the counterparty
deteriorates. In addition, with frequent trading counterparties, securities firms enter into
agreements, such as master netting and collateral arrangements, which aggregate and
manage individual transactions exposures.
Securities firms have significant exposure to funding risk because a majority of their
assets are financed by short-term borrowing from wholesale sources, such as banks. The
liquidation of their asset portfolios is viewed as a source of funding only as a last resort.
Accordingly, the primary liquidity risk facing securities firms is the risk that sources of
funding will become unavailable, thereby forcing a firm to wind down its operations. To
mitigate this risk, securities firms hold liquid securities and attempt to diversify their
funding sources.
Financial risks of insurance activities
Insurance activities are broadly divided into life and non-life insurance, and firms
specializing in either category face different risks. Specifically, these two types of
activities require firms to hold different technical provisions, by virtue of both prudent
business practices and regulatory mandates. For life insurance companies, technical
provisions typically are the greater part of their liabilities—about 80%, according to the
Joint Forum report—and they reflect the amount set aside to pay potential claims on the
policies underwritten by the firms; capital is a relatively small percentage. Thus, the
dominant risk arising from life insurance activities is whether their technical provisions
are adequate, as measured using actuarial techniques. While term-life insurance policies
are based solely on providing death benefits, whole-life insurance policies typically
permit their holders to invest in specific assets and even to borrow against the value of
the policies. Hence, life insurance companies also face market and credit risks.
For a non-life insurance company, technical provisions make up about 60% of liabilities,
which is less than observed for life insurance companies. The different balance between
provisions and capital for non-life insurance companies reflects the greater uncertainty of
non-life claims. The need for an additional buffer for risk over and above provisions
accounts for the larger relative share of capital in non-life insurance companies' balance
sheets.
Regarding funding risk, insurance activities are different from other financial activities
because they are prefunded by premiums; for this reason, insurance companies do not
rely heavily on short-term market funding. Life insurance companies have more than
90% of their assets in the investment portfolio held to support their liabilities. Hence,
whether the investment portfolio generates sufficient returns to support the necessary
provisions is a major financial risk. Investment risks include the potential loss in the
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6. value of investments made and therefore include both market and credit risk. These
investment risks traditionally have been managed using standard asset-liability
management techniques, such as imposing constraints on the type and size of investments
and balancing maturity mismatches between investments and liabilities.
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