Banking Terms and Concepts

Various Risks associated with Banking Business

There are various kinds of risks associated with the banking such as credit risk, interest rate risk, foreign exchange rate risk, liquidity risk, equity price risk, commodity price risk, legal risk, regulatory risk, reputation risk, operational risk etc. They can be broadly converged into three categories viz. Credit Risk, Market Risk and Operational Risk. They have been briefly discussed below:

Credit Risk

Credit risk is risk of loss arising from a borrower who does not make payments as promised. This event would be called “Default” and the person/ company/ entity would be called “Defaulter”. Due to this, credit risk is also known as “Default Risk”.

Market Risk

Market risk is the possible losses due to movement in the market prices. There are four standard market risk factors viz. stock prices, interest rates, foreign exchange rates, and commodity prices. Apart from there are associated market risks as follows:

  • Equity risk, the risk that stock prices and/or the implied volatility will change.
  • Interest rate risk, the risk that interest rates and/or the implied volatility will change.
  • Currency risk, the risk that foreign exchange rates and/or the implied volatility will change.
  • Commodity risk, the risk that commodity prices (e.g. corn, copper, crude oil) and/or implied volatility will change.