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Banking Risk

Risk	Description	Mitigation
Credit	Credit risk is the risk of non-repayment and consequential financial loss suffered by the bank. The credit risk is further classified into credit default risk and concentration risk. Credit Default Risk: It is the risk emanating from the borrowers due to non-repayment beyond scheduled days. Concentration Risk: It is the risk emanating when the banks’ loan portfolio is concentration into the segment. Credit Default Risk arises due to failure by the borrower to repay the amount. The reasons for such non-payment can range from deteriorating financial health of the borrower to borrower’s diversion of the fund. The concentration risk arises when bank concentrates loan assets into a segment. When a segment experiences a headwind, the concentration risk materialises (i.e. bank experiences significant individual defaults in that segment)	Implementation of detailed Credit Risk Policy covering acceptability and lending terms of various business Obtaining charge over assets such as cash, premises, stocks and debtors Obtaining personal guarantees from owners and directors
Liquidity	The balance sheet of the bank is structurally imbalanced, i.e. the term of a major chunk of assets are longer than the terms of funding liabilities. Thus, during the time of stress, the bank may not be able to meet the liability requirements. This can sometimes lead to the bank being insolvent.	Maintaining sufficient high-quality liquid assets Increasing the term of deposits through instruments such as fixed deposits
Compliance	The banking industry is a heavily regulated industry and in the past ten years more so. The continually changing regulations require the bank to invest in significantly in the compliance area to avoid being penalised for non-compliance.	Development of compliance risk policies and procedures Regular compliance monitoring and testing by the internal audit function Identification of reporting requirements and development of dashboards Regular compliance-related training to relevant staffs
Operational	Operational risk arises due to failed internal controls, people and systems or due to external events. Due to activities such as fraud, limit breaches, systems failures banks suffer heavy losses annually.	Set up of strong internal controls Strengthened three lines of defences through regular subject matter training Development of business continuity plans and BIA when the risk materialises Maintaining recovery sites
Market	Market risk is the risk of loss arising due to adverse price movements in the on and off-balance sheet instruments. The market risk can be further classified into trading and non-trading risk. The risk of loss increases due to adverse movement in interest rates, credit spreads, prices of equities et al.	Diversification of sources and sectors of deposits and loans to reduce concentration Maintaining a prescribed Net Open Limit for Foreign Currency exposure Stress testing to detect weaknesses