1. People risk: Incompetency or wrong posting of personnel and misuse of powers 2. Information technology risk: The failure of the information technology system, the hacking of the computer network by outsiders, and the programming errors that can take place any time and can cause loss to the bank 3. Processrelated risks: Possibilities of errors in information processing, data transmission, data retrieval, and inaccuracy of result or output Operational risk can lead to a bank’s collapse The fall of one of Britain’s oldest banks, Barings, in 1995, is an example of operational risk leading to a bank’s collapse. It was mainly due to failure of its internal control processes. One of Barings’ traders in Singapore, Nick Leeson, was able to hide his trading losses for more than two years. Nick was able to authorize his own trades and enter them into the bank’s system without any supervision due to weak and inefficient internal auditing and control measures. His Receive email alerts for new research on MS : Email Sign Up
3/29/2017 Mustknow: The 8 types of bank risks Market Realist 11/28 supervisors were alerted after the losses became too huge. By that time, it wasn’t possible to keep the trades and the losses a secret. An investor's guide to banking risks PART 8 OF 14 Liquidity risk Liquidity by definition means a bank has the ability to meet payment obligations primarily from its depositors and has enough money to give loans. So liquidity risk is the risk of a bank not being able to have enough cash to carry out its daytoday operations. Provision for adequate liquidity in a bank is crucial because a liquidity shortfall in meeting commitments to other banks and financial institutions can have serious repercussions on the bank’s reputation and the bank’s bond prices in the money market. Liquidity risk can sometimes lead to a bank run, where depositors rush to pull out their money from a bank, which further aggravates a situation. So fullservice banks like JPMorgan ( JPM ), traditional banks like Wells Fargo ( WFC ), investment banks like Goldman Sachs ( GS ) and Morgan Stanley ( MS ), and any other bank included in an ETF like the Financial Select Sector SPDR Fund ( XLF ) have to proactively manage their liquidity risk to stay healthy. Mustknow: Liquidity risk—when banks have too little cash By Saul Perez | Sep 1, 2014 11:37 am EDT Receive email alerts for new research on MS : Email Sign Up
3/29/2017 Mustknow: The 8 types of bank risks Market Realist 12/28 In conditions of tight liquidity, the banks generally turn to the Fed. Look at the chart above to see how financial institutions borrowed massively from the Fed during the subprime crisis of 2008–2009.
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