Market Risk

Market Risk - FIs monitor the financial condition of...

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Market Risk 1 FIs are large holders of financial assets. Market risk is related to the uncertainty of earnings from changes in market conditions (asset prices, interest rate risk, and foreign exchange risk). This risk applies to the FI’s trading portfolio, rather than traditional activities of deposit-taking and lending. More in Chapter 10.
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Credit Risk 2 FIs extend credit to individuals and corporations with the expectation the loans are repaid with interest. Loan Officers evaluate the credit-worthiness of borrowers through the underwriting process. In the event of default, recovery of the remaining principal, plus the unearned interest, is at risk. Charge-offs can significantly impact FI profits and, in extreme cases, solvency. The longer the loan term, the greater the credit risk.
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Credit Risk 3 Different FIs have different credit risk tolerances. A higher risk loan carries a higher interest rate.
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Unformatted text preview: FIs monitor the financial condition of borrowers throughout the life of the loan. Through diversification, FIs can minimize credit risk: Firm-Specific Credit Risk Risk from default of a single firm. Systematic Credit Risk Risk likely to impact the broader customer base (e.g. recession, inflation, rising gas prices, etc.). More in Chapters 11 & 12. Off-Balance Sheet (OBS) Risk 4 Banks record assets and liabilities on the balance sheet. They are not required to include contingent items. e.g. letters of credit, loan commitments, etc. Banks earn immediate fee income on contingent items without posting the item on its books. If not on the books, the full amount is not included in capital and reserve requirements or deposit insurance calculations. These off-balance sheet (OBS) items represent risk. More in Chapter 13....
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This note was uploaded on 01/26/2012 for the course FIN 4620 taught by Professor Patriciarobertson during the Spring '12 term at Kennesaw.

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Market Risk - FIs monitor the financial condition of...

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