M|S
Relentless Pursuit of Excellence
INSTRUCTOR’ GUIDELINES
Risk Types
MSc Financial Services
Maria Siopacha
Academic Year 2018/2019
July 2019
Agenda
• Primary and consequential risk types
• Financial risks
• Non financial risks
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Recommended reading
• Book 2
- Chapter 1 pg. 14
- Appendix 1.1
• Book 1
- Chapter 12.1.1
- Chapter 26.1
- Chapter 27.1.2
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Risk types
• Divide up risk portfolio according to the type of risk
that organisation is running
• What you think are primary risks?
active portfolio
managemnet credit
risk investment
risk,interest rate risk
• What you think are consequential risks?
consequence for being in the
business ex. liquitation risk and
operational risk- people, natural
disasters operational risk etc
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Primary risks
• Broad risk categories that are “controllable" and
“manageable”
- According to regulatory standards and banking
industry
- Remember regulatory capital under Pillar 1
• Market risk
• Credit risk
• Operational risk
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Market risk
• Market risk is the risk of losses due to movements
in the level or volatility of market prices
- Can arise from changes in interest rates, foreign
exchange rates, or equity and commodity price
factors
ex. long position
exchage rate falls
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Credit risk
• Credit risk is the risk of loss due to the fact that
counterparties may be unwilling or unable to fulfill
their contractual obligations
- Can arise from a change in the factors that drive
the credit quality of an asset
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Operational risk
• Operational risk is the risk of loss resulting from
failed or inadequate internal processes, systems,
and people, or from external events
- E.g., frauds, inadequate computer systems, a
failure in controls, a mistake in operations, a
guideline that has been circumvented, or a
natural disaster
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Risk interactions
• Three categories interact with each other, so that
any classification is, to some extent, arbitrary
• Credit risk can create market risk
• Operational risk can create market and credit risk
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Consequential risks
• Business risk
• Liquidity risk
• Reputational risk
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Business risk
• Business risk is the risk of loss in the firm’s
earnings, which arises from declines in revenues
that cannot be offset by decreases in costs
ex. invest in a product and
fail, shrink of customers
always decrease income for
a firm
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Liquidity risk
• Liquidity risk is the risk of losses due to the need
to liquidate positions to meet funding requirements
- Asset liquidity risk
pay increased fundings, ex.
- Funding risk
expired liabilities and you have
to renew it and pay more
• Less amenable to formal quantification hence not
included in formal Basel capital charges
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Liquidity risk
• Asset liquidity is the risk that a position cannot
easily be unwound or offset at short notice without
significantly influencing the market price, because
of inadequate market depth or market disruption
• Funding liquidity risk is the current or prospective
risk arising from an institution’s inability to meet
its liabilities and obligations as they come due
without incurring unacceptable losses
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Reputational risk
• Risk of indirect losses to earnings arising from
negative public opinion
• Damage in client trust that can have a material
impact to the institution
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Other risk types
• Regulatory risk: changes in regulatory landscape
can result in the firm having to increase its capital
and liquidity, restricted business activities
• Strategic risk: risk of significant investments for
which there is a high uncertainty about success
and profitability; can also be related to a change in
the strategy of a company vs. its competitors
• Model risk: the risk of losses due to inappropriate
pricing or risk measurement models
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And some more
political, enviromental risk, culture risk,
cyber risk, climate
• Think of some!
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Emerging risks
Source: Ninth annual EY/IIF global bank risk management survey, November 2018
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Resources
• Reputational risk
- [Link]
and-increasing-overall-efficiency/
- Risk Insights Magazine Issue 10, Reputational Risk: The value of
risk mitigants
• Business environment is “becoming riskier”
- [Link]
becoming-riskier/
• Model risk
- [Link]
risk-director-tiaa-bank/
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Recap
• Keywords of the day
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Q&A
Thank you for your
attention!
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