Risks Incurred by

Financial Institutions
Prepared by: Vicky G. Arquero
FI’s Risks
All FIs face a variety of risks, but generally speaking all FIs face:

• Default risk on at least a portion of their assets,

• Market risk, or the risk that the value of FI investments may
change,
• Liquidity risk, due to a mismatch in maturity of assets and
liabilities,
• Interest rate risk due to the same mismatch above,
FI’s Risks
All FIs face a variety of risks, but generally speaking all FIs face:

• Foreign exchange risk due to foreign currency assets and

liabilities or changing competitive conditions with foreign FIs as
currency values fluctuate,
• Operating cost risk because there are fixed costs involved in
providing all financial services,
• Insolvency risk, any of the stated risks may result in
insolvency at a FI.
FI’s Risk
Some FIs face:

• Sovereign risk on overseas investments,

• Off balance sheet risks due to contingent assets and
liabilities,
• Technology and Operational risk due to either over-
investment in a technology relative to customer demand, or a
failure of technology, respectively.
FI’s Risks

• Every saving and investment action involves different risks

and returns. In general, financial theory classifies
investment risks affecting asset values into two categories:
systematic risk and unsystematic risk. Broadly speaking,
investors are exposed to both systematic and unsystematic
risks.
FI’s Risks

• Systematic risks, also known as market

risks, are risks that can affect an entire economic market
overall or a large percentage of the total market. Market
risk is the risk of losing investments due to factors, such as
political risk and macroeconomic risk, that affect the
performance of the overall market. Market risk cannot be
easily mitigated through portfolio diversification. Other
common types of systematic risk can include interest rate
risk, inflation risk, currency risk, liquidity risk, country risk,
and sociopolitical risk.
FI’s Risks

• Unsystematic risk, also known as specific

risk or idiosyncratic risk, is a category of risk that only
affects an industry or a particular company. Unsystematic
risk is the risk of losing an investment due to company or
industry-specific hazard. Examples include a change in
management, a product recall, a regulatory change that
could drive down company sales, and a new competitor in
the marketplace with the potential to take away market
share from a company. Investors often use diversification to
manage unsystematic risk by investing in a variety of
assets.
FI’s Risks
In addition to the broad systematic and unsystematic risks, there are several specific types of risk,
including:

• Business Risk
Business risk refers to the basic viability of a business—the question of
whether a company will be able to make sufficient sales and generate
sufficient revenues to cover its operational expenses and turn a profit.
While financial risk is concerned with the costs of financing, business
risk is concerned with all the other expenses a business must cover to
remain operational and functioning. These expenses include salaries,
production costs, facility rent, office, and administrative expenses. The
level of a company's business risk is influenced by factors such as the
cost of goods, profit margins, competition, and the overall level of
demand for the products or services that it sells.
FI’s Risks

• Credit or Default Risk

Credit risk is the risk that a borrower will be unable to pay the
contractual interest or principal on its debt obligations. This type of risk
is particularly concerning to investors who hold bonds in their
portfolios. Government bonds, especially those issued by the federal
government, have the least amount of default risk and, as such, the
lowest returns. Corporate bonds, on the other hand, tend to have the
highest amount of default risk, but also higher interest rates. Bonds
with a lower chance of default are considered investment grade, while
bonds with higher chances are considered high yield or junk bonds.
Investors can use bond rating agencies—such as Standard and Poor’s,
Fitch and Moody's—to determine which bonds are investment-grade
and which are junk.
FI’s Risks

• Country Risk
Country risk refers to the risk that a country won't be able to
honor its financial commitments. When a country defaults on
its obligations, it can harm the performance of all other
financial instruments in that country – as well as other
countries it has relations with. Country risk applies to stocks,
bonds, mutual funds, options, and futures that are issued
within a particular country. This type of risk is most often
seen in emerging markets or countries that have a severe
deficit.
FI’s Risks

• Foreign-Exchange Risk
When investing in foreign countries, it’s important to
consider the fact that currency exchange rates can change
the price of the asset as well. Foreign exchange risk (or
exchange rate risk) applies to all financial instruments that
are in a currency other than your domestic currency. As an
example, if you live in the U.S. and invest in a Canadian
stock in Canadian dollars, even if the share value
appreciates, you may lose money if the Canadian dollar
depreciates in relation to the U.S. dollar.
FI’s Risks

• Interest Rate Risk

Interest rate risk is the risk that an investment's value will
change due to a change in the absolute level of interest
rates, the spread between two rates, in the shape of the
yield curve, or in any other interest rate relationship. This
type of risk affects the value of bonds more directly than
stocks and is a significant risk to all bondholders. As interest
rates rise, bond prices in the secondary market fall—and vice
versa.
FI’s Risks

• Political Risk
Political risk is the risk an investment’s returns could suffer
because of political instability or changes in a country. This
type of risk can stem from a change in government,
legislative bodies, other foreign policy makers, or military
control. Also known as geopolitical risk, the risk becomes
more of a factor as an investment’s time horizon gets longer.
Investment Risks

• Counterparty Risk
Counterparty risk is the likelihood or probability that one of
those involved in a transaction might default on its
contractual obligation. Counterparty risk can exist in credit,
investment, and trading transactions, especially for those
occurring in over-the-counter (OTC) markets. Financial
investment products such as stocks, options, bonds, and
derivatives carry counterparty risk.
Investment Risks

• Liquidity Risk
Liquidity risk is associated with an investor’s ability to
transact their investment for cash. Typically, investors will
require some premium for illiquid assets which compensates
them for holding securities over time that cannot be easily
liquidated.
ANTI-MONEY LAUNDERING ACT
(AMLA)

• Money Laundering is a crime whereby the

proceeds of an unlawful activity as defined in the AMLA are
transacted or attempted to be transacted to make them
appear to have originated from legitimate sources.
COMMON TYPES OF FRAUDS AND
SCAMS

• Fraud is an act, expression, omission or concealment

that deceives another to the fraudster’s advantage while
scams are fraudulent business schemes to
mislead/swindle/victimize a person or persons with the goal
of financial gain.
COMMON TYPES OF FRAUDS AND
SCAMS

• Text Scams
Fraudulent text messages stating that your mobile phone
number won in a raffle contest either by a government
institution or popular game show. Sample text message
usually say ‘To claim the prize, the victim should transmit
money to a designated bank account or through a
remittance company to pay for taxes and/or remittance fee
or send prepaid cellphone load to the scammers’ prepaid
mobile phone numbers.
COMMON TYPES OF FRAUDS AND
SCAMS

• Credit Card and ATM Skimming

Illegal copying of information from the magnetic strip of the
credit card or ATM through a skimming device. Scammers
use the information stolen to: access somebody’s account;
manufacture counterfeit cards or use in online transactions.
Your card may be skimmed if: (a) used on an ATM terminal
with an attached skimming device or if (b) an employee of a
gasoline station or a restaurant surreptitiously puts your card
into an electronic skimming device.
COMMON TYPES OF FRAUDS AND
SCAMS

• Ponzi/Pyramiding Scheme

Ponzi scheme organizers lure prospective investors with high

returns. The fraudsters normally exist for a limited period of
time. They appear to be religiously paying their investors
during initial stage. Thereafter, they will quickly disappear,
leaving the investors, particularly those down-lines, empty
handed. The losing investors cannot run after the program
managers who are either unknown or whose names and
addresses, are usually fictitious.
COMMON TYPES OF FRAUDS AND
SCAMS

• Spurious Investments

Fraudulent commercial documents being sold or traded by

individuals or companies and are allegedly issued, secured
or guaranteed by the BSP or international banks.
COMMON TYPES OF FRAUDS AND
SCAMS

• Identity Theft

Fraudsters get the personal information they need to assume

your identity through theft. With these information, the
perpetrator causes the creation of a financial transaction,
e.g., a loan, intermediary account or other financial account,
in the victim’s name.
COMMON TYPES OF FRAUDS AND
SCAMS

• Phishing

Emails from your bank or credit card company that looks like
the “real thing” and asking for information like PIN, account
number, log in IDs and passwords that can be exploited for
fraudulent purposes. Phishing may be done using methods
other than email. Mobile phone text messages, chat rooms,
fake banner ads, message boards and mailing lists, fake job
search sites and job offers, and fake browser toolbars may also
be used to get information.
COMMON TYPES OF FRAUDS AND
SCAMS

• Spoofing

A website that appears to be legitimate but it is actually

created by a fraudster. The main purpose is to trick the user
into releasing sensitive information such as PIN, account
number, log in IDs, and passwords that can be exploited for
fraudulent purposes.
COMMON TYPES OF FRAUDS AND
SCAMS

• Nigerian Scams
Emails, fax or letter from strangers or even friends (subject of hacked
emails). These strangers will tell you that they have either large sums of
money for remittance or a very good business offer and they need your
account to bring the money to the country. They will ask you to either share
your bank information or create an account with a particular
bank/institution. With the bank information, they will draw up false
instruments against your account. Friends (whose emails have been
hacked), on the other hand, will relate a sad story telling they are in need of
emergency financial help. They will ask you to send money to a temporary
account, which could be easily closed after receiving the money.
COMMON TYPES OF FRAUDS AND
SCAMS

• Budol-Budol Scam

Victim will be shown bundles of cash to get the victim’s trust

and then the scammer will ask for cellphone or other
important things in exchange for the fake money. The
scammer may also leave important things in exchange for
cash. Hypnotism is also said to be used for this modus
operandi.
COMMON TYPES OF FRAUDS AND
SCAMS

• Dugo-Dugo Scam

Victim receives a call from someone that a loved one has

been kidnapped or has been hurt. The caller will tell the
victim to make a money transfer to a stranger or ask for
jewelries or other valuable items in exchange for the safety
of the kidnapped relative or to pay for the medical expenses
of the loved one.
END