Friday, 19 June 2009

Banks - It's All about Risk

Whether a financial institution specializes in making commercial loans or consumer loans, banking is centered on: risk management.

Bank accepts 3 types of risks:
  • credit,
  • liquidity, and,
  • interest rate,
and they get paid to take on this risk.

Borrowers and lenders pay banks through interest or fees because they are unwilling to manage the risk on their own, or because banks can do it more cheaply.

But just as their advantage lies in mitigating others' risk, banks' greatest strength - the ability to earn a premium for managing credit and interest rate risk - can quickly become their greatest weakness if, for example, loan loss grow faster than expected.

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