Banking risks are the likelihood of an adverse outcome of operations conducted by credit institutions, or the occurrence of unforeseen situations. The activities of each bank are based on risk, starting with the possibility of loss due to non-return of credit resources and ending with losses from natural disasters. That is why the management of this aspect is considered one of the most important tasks of the country's economic life.
In the process of studying by experts, a certain classification of banking risks was developed based on various criteria. For example, depending on the sphere of influence, external and internal can be distinguished. The first involves the impact of political, social and other environmental changes. And internal risks are directly related to the activities of a credit institution. If we consider banking risks by the methods of their regulation, then they can be divided into those of open and closed type. The latter is influenced, that is, it can be influenced through insurance or diversification.
Separately, it is worth considering various types of banking risks of an internal nature, since this is the most extensive category, including currency, interest, credit, market and many other risks. So, foreign exchange implies the probability of significant losses of the bank due to a sharp change in the exchange rate. Interest rate risk is based on the possibility of lower profits due to variations in discount interest rates. Market banking risks are associated with the conjuncture of the financial market and the value of the assets of an enterprise in it.
Credit type implies the probability of any losses associated with untimely, full or partial repayment of borrowed funds. The greatest loss occurs in the event of a complete refusal to pay the loan body and interest on it due to insolvency of the client. Since 80% of all operations of commercial banks are loans and borrowings, the reduction of credit risk is an urgent problem of our time.
Common internal risks include the operational form and abuse of power. Each bank is faced with the first one, since there is always the possibility of an ineffective internal control system or errors in the daily activities of the company. The risk of abuse is the improper behavior of employees of a credit institution, non-compliance with job descriptions or gross violation of basic rules, for example, disclosure of information that is a commercial secret, or the use of confidential data for other purposes.
In order for banking risks to have the least impact on the activities of these institutions, they should be properly managed. As effective tools, it is possible to single out the formation of required reserves on the accounts of the central bank, hedging and diversification, the balance of income and outflow of resources, and an increase in the reserve fund. The government is also interested in reducing the risk level of each bank, since the bankruptcy of one can lead to a fall in the entire banking structure and a crisis. Therefore, the central bank establishes the required reserve ratio, that is, commercial banks open their accounts in the national. They deduct a certain percentage from each transaction to these accounts. This approach can be considered a kind of "airbag", which provides coverage for damage in case of loss.
If we talk about credit operations, then in this area the bank requires specific collateral in the form of a pledge, surety or guarantee. Not a single loan, especially in a large amount, is issued without confirmation of the solvency of the client and providing it in case of non-repayment of funds. Hedging and diversification involves insurance of risks and their qualitative distribution, that is, losses in one sector pay off at the expense of profit in another.