Banks play an important role in allocating financial resources to productive projects that support economic growth. However, banks face various risks that can impact their financial performance and the broader economy. These risks include liquidity risk, credit risk, interest rate risk, solvency risk, exchange rate risk, country risk, market risk, and operational risk. If these risks materialize, they can reduce a bank's assets, equity and earnings, forcing banks to tighten credit terms and lower lending, which slows economic growth. The document provides examples of how each risk could negatively impact a bank's balance sheet if losses are realized.

2. INTRODUCTION
•Banks play a very critical role in reallocating the financial resources to those
who have effective & productive projects which help in improving the
economic conditions of the countries.
DEPOSITS====BANKS ====LOANS====INVESTMENTS====ECONOMIC GROWTH

3. BARRIERS TO BANKS SUCCESS
THERE ARE MANY DIFFERENT TYPES OF RISKS THAT COULD AFFECT
BANKS AND COUNTRIES PERFORMANCE.

4. TYPES OF RISKS IN BANKS
1. Liquidity risk
2. Credit risk
3. Interest rate risk
4. Solvency risk
5. Exchange rate risk
6. Country risk
7. Market risk
8. Operation risk

5. FINANCIAL AND ECONOMIC IMPLICATIONS
SUCH RISKS COULD AFFECT BANKS:
• FINANCIALLY BY REDUCING ASSET, EQUITY, & EARNING VALUES.
• ECONOMICALLY BY MAKING BANKS TO START TO TIGHTEN THEIR CREDIT TERMS
WHICH WILL RESULT IN ISSUING LOWER AMOUNTS OF LOANS AND THUS LOWER
ECONOMIC GROWTH.

6. 1. LIQUIDITY RISK (EXAMPLE)
ABC BANK HAS $1000 IN THE FOLLOWING ASSET
CLASSES:
• CASH: COVERING EXPECTED WITHDRAWALS.
• SECURITIES: TREASURY BILLS, NOTES, & BONDS.
• LOANS: AUTO, MORTGAGE, PERSONAL, COMMERCIAL LOANS.
Assets Liabilities
Cash $100
Securities $300
Loans $600
Total $1000
Deposits $800
Equity $200
Total $1000
ABC Balance sheet

7. 1. LIQUIDITY RISK (EXAMPLE)
SUDDENLY
•CUSTOMERS ARE LINING UP WANT TO
WITHDRAW $120 IN CASH
OR
•NEW CLIENTS WANT TO BORROW $120 IN CASH
Assets Liabilities
Cash $100
Securities $300
Loans $600
Total $1000
Deposits $800
Equity $200
Total $1000
ABC Balance sheet

8. 1. LIQUIDITY RISK (EXAMPLE)
ABC BANK HAS INSUFFICIENT CASH TO MEET CLIENTS'
DEMANDS AS IT HAS $100 IN CASH AND CASH
WITHDRAWAL REQUESTS ARE $120 SO THERE’S A
SHORTAGE OF $20 IN CASH.
CASE 1.
ABC SOLD PART OF ITS SECURITIES FOR $20 WITHOUT
REALIZING GAINS OR LOSSES TO COMPLEMENT THE
REQUIRED $120 IN CASH TO MEET CLIENTS’ REQUESTS.
Assets Liabilities
Cash $100
($100)
Securities $300
($20)
Loans $600
Total $880
Deposits $800
($120)
Equity $200
Total $880
ABC Balance sheet
Such risk reduced total assets and liabilities by 120 as long as no losses realized from selling securities.

9. 1. LIQUIDITY RISK (EXAMPLE)
CASE 2.
THE SECURITIES HAS DECLINED IN VALUE WHICH MADE
A CHANGE IN THE FAIR VALUE OF THE SECURITIES FROM
$300 TO $298 WHICH RESULTED IN REDUCING THE
ASSETS & EQUITY FOR $2.
ABC SOLD PART OF ITS SECURITIES FOR $20 TO
COMPLEMENT THE REQUIRED $120 IN CASH TO MEET
CLIENTS’ REQUESTS.
Assets Liabilities
Cash $100
($100)
Securities $300
Value reduction ($2)
Sale ($20)
Loans $600
Total $878
Deposits $800
($120)
Equity $200
Losses ($2)
Total $878
ABC Balance sheet
Such risk reduced total assets, liabilities, & Equity as shown in ABC balance sheet.

10. 2. CREDIT RISK (EXAMPLE)
Assets Liabilities
Loans $1000
Total $1000
Deposits $800
Equity $200
Total $1000
•ABC BANK HAS $1000 IN LOANS
ABC Balance sheet

11. 2. CREDIT RISK (EXAMPLE)
Assets Liabilities
Loans $1000
($100)
Total $900
Deposits $800
Equity $200
($100)
Total $900
•ABC BANK HAS $1000 IN LOANS ABC BALANCE SHEET
SUDDENLY
• A BORROWER FAILED TO PAY $100 IN LOANS
RESULTED IN REDUCING TOTAL ASSETS & EQUITY

12. 3. INTEREST RATE RISK
Assets % Liabilities %
Variable rate Loans $600 5%
Fixed rate loans $400 6%
Total $1000
Variable rate Deposits $300 4%
Fixed rate Deposits $500 5%
Equity $200
Total $1000
ABC BALANCE SHEET
INTEREST REVENUES = 54
$600 X 5% = 30
$400 X 6% = 24
INTEREST EXPENSES = 37
$300 X 4% = 12
$500 X 5% = 25
NET INTEREST INCOME = 54 – 37 = 17

13. 3. INTEREST RATE RISK
Assets % Liabilities %
Variable rate Loans $600 6%
Fixed rate loans $400 6%
Total $1000
Variable rate Deposits $300 5%
Fixed rate Deposits $500 5%
Equity $200
Total $1000
ABC BALANCE SHEET
INCREASE IN MARKET INTEREST RATE BY 1%
INTEREST REVENUES = 60
$600 X 6% = 36
$400 X 6% = 24
INTEREST EXPENSES = 40
$300 X 5% = 15
$500 X 5% = 25
NET INTEREST INCOME (NII) = 60 – 40 = $20 ======= NII INCREASED BY $3

14. 4. SOLVENCY RISK (EXAMPLE)
Assets Liabilities
Loans $1000
Total $1000
Deposits $800
Equity $200
Total $1000
•ABC BANK HAS $1000 IN LOANS & $200 IN EQUITY
ABC Balance sheet

15. 4. SOLVENCY RISK (EXAMPLE)
Assets Liabilities
Loans $1000
($300)
Total $700
Deposits $800
Equity $200
($300)
Total $700
• ABC BANK HAS $1000 IN LOANS ABC BALANCE SHEET
SUDDENLY
• A BORROWER FAILED TO PAY $300 IN LOANS
RESULTED IN REDUCING TOTAL ASSETS & EQUITY
• EQUITY FAILED TO ABSORB ASSETS REDUCTION
ABC BECOMES INSOLVENT (LIABILITY > ASSETS)

16. 5. EXCHANGE RATE RISK (EXAMPLE)
Assets Liabilities
Cash $1000
Total $1000
Deposits $800
Equity $200
Total $1000
ABC Balance sheet

17. 5. EXCHANGE RATE RISK (EXAMPLE)
Assets Liabilities
Cash $1000
($112)
Total $888
Deposits $800
Equity $200
($112)
Total $888
• ABC BANK BOUGHT 800 EURO AGAINST $1000 FROM A TOURIST
WHEN (USED/EURO= 0.8)
SUDDENLY
DOLLAR HAS APPRECIATED AGAINST EURO
• ABC BANK SOLD 800 EURO AGAINST $888
TO A CORPORATE CLIENT FOR IMPORTING REASONS
AT (USD/EURO=0.9)
LOSSES $112 ($1000 - $888)
ABC Balance sheet

18. 6. COUNTRY RISK (EXAMPLE)
ABC BANK FACED ONE OF THE FOLLOWING:
• POLITICAL INSTABILITY (REVOLUTION, PRESIDENTIAL
ELECTION, OR TERRORISM)
• NATURAL DISASTERS (VOLCANIC ERUPTION,
HURRICANES, OR EARTHQUAKE)
• CULTURAL ISSUES (ISLAMIC FINANCIAL PRODUCTS
ARE PREFERABLE OVER THE CONVENTIONAL ONES)
SUCH RISK COULD SEVERELY REDUCES THE NET INCOME
Account $
Revenues $1000
Expenses $700
Net income $300
Extraordinary Expenses ($200)
Net income $100
ABC Income statement

19. 7. MARKET RISK (EXAMPLE)
MARKET (SYSTEMATIC) RISK: IT IS A RISK THAT CAN’T BE MINIMIZED BY DIVERSIFYING
BANK ASSET CLASSES IN PORTFOLIOS.
ABC BANK FACES ONE OF THE FOLLOWING:
• ASSET MARKET CRASHES (INSTABILITY IN AUTO AND REAL ESTATE MARKET PRICES)
• NATIONAL CURRENCY DEVALUATION (INSTABILITY IN THE VALUE OF NATIONAL CURRENCY)
• ECONOMIC RECESSION (INSTABILITY IN ECONOMIC CONDITIONS)
• INTEREST RATE CHANGES (HIGH FLUCTUATION IN MARKET INTEREST RATE)

20. 8. OPERATION RISK (EXAMPLE)
ANY LOSSES INCURRED BECAUSE OF MISTAKES MADE BY PEOPLE OR SYSTEMS CALLED OPERATION RISK.
ABC BANK FACES ONE OF THE FOLLOWING:
• ONE OF THE EMPLOYEES DEPOSITED WRONG AMOUNTS IN SOMEONE’S BANK ACCOUNT ON THE SYSTEM.
• THE BANK USES OUTDATED COUNTING MACHINES RESULTED IN MAKING BANKNOTES COUNTING MISTAKES AND AVOID DETECTING
COUNTERFEIT CURRENCIES.
• THERE ALWAYS AN OUTAGE IN THE NETWORK WHICH AFFECTED CLIENTS’ SATISFACTION.
• OUTDATED SOFT WARES MAKE EMPLOYEES VULNERABLE TO MISTAKES.
OPERATION RISK REDUCES BANK EARNINGS

21. THANKS
ANY QUESTIONS
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