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RISK MANAGEMENT IN BANKS | CENTRAL BANKING STUDY MATERIAL

RISK MANAGEMENT IN BANKS

This article discusses the risk management in banks and Central banking study material 2022 that we have for you.

CAIIB exam 2022 is being held by IIBF in November. CAIIB exam is one of the toughest exams to crack, but once you clear it, you open yourself up to a whole new set of opportunities that will help you move forward in your career. Our experts have compiled a CAIIB study material Nov 2022, which includes subjects like central banking, human resource management, etc. These include live classes, which are soon to be started, recorded video lectures, and other things discussed later in this article. 

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Full Course Videos in Hindi English
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Now we will discuss one of the most important topics of the CAIIB exam Nov 2022, which is risk management in banks.

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RISK MANAGEMENT

Although risk management in Indian banks is a relatively new technique, it has already been demonstrated to improve the effectiveness of these banks’ governance, as such practices tend to strengthen the corporate governance of a financial organisation. Financial institutions must demonstrate their mettle in periods of market turbulence and fluctuation by enduring the market changes, achieving sustainability in terms of growth, and having a stable share value. Mitigating all the risks and benefits of the bank’s products and services would be a crucial part of the risk management framework. Thus, a practical framework for risk management is vital to take both internal and external threats into account.

There are various types of risks which are explained below: 

CREDIT RISK

The biggest risk facing banks is credit risk. When counterparties or borrowers breach contractual duties, it happens. One instance is when borrowers fail to make a loan payment for the principal or interest. Mortgages, credit cards, and fixed income assets are all subject to default. Derivatives and offered guarantees are two other instances where obligations may not be met.

Due to the nature of their business model, banks cannot be completely insulated from credit risk, but they can reduce their exposure in a number of ways. Because declines in an industry or issuer are frequently unforeseen, banks diversify to minimize risk.

By doing this, banks are less likely to be overexposed to a category with significant losses during a credit slump. They can lend money to borrowers with solid credit histories, conduct business with reputable counterparties, or have collateral on hand to support the loans to reduce their risk exposure.

OPERATIONAL RISK

Operational risk is the possibility of suffering losses due to mistakes, hiccups, or damage brought on by people, systems, or procedures. Operational risk is lower for specific business activities like retail banking and asset management and higher for sales and trading. Internal fraud and transaction errors are examples of losses brought on by human error. 

Fraud can happen on a bigger scale when a bank’s cybersecurity is compromised. Hackers can use it to extort additional funds from the institutions by stealing client data and bank funds. Banks suffer a loss of capital and consumer confidence in such circumstances. In the future, it may be more challenging to draw in deposits or businesses if the bank’s reputation is damaged.

MARKET RISK 

Market risk primarily results from a bank’s capital market activities. This is because credit spreads, interest rates, commodity prices, and equity markets are unpredictable. If banks engage in a lot of trading or investing in the capital markets, they are more exposed.

As a result of a bank’s potential investment in businesses that produce commodities, commodity prices also have an impact—the value of the company and the investment change along with the value of the commodity. Supply and demand shifts, frequently difficult to foresee, generate changes in commodity prices. Investment diversification is crucial to lowering market risk. Hedging their investments with other, inversely linked investments is another way banks might lower their investment.

LIQUIDITY RISK

The ability of a bank to get money to meet funding obligations is referred to as liquidity risk. Allowing clients to withdraw their deposits is one of your obligations. A snowball effect may occur if clients are not given cash in a timely manner. If a bank delays giving some clients cash for a day, other depositors can rush to withdraw their money as they lose faith in the bank. This further reduces the bank’s capacity to extend credit and triggers a bank run.

Over-reliance on short-term funding sources, a balance sheet that is heavily weighted in illiquid assets, and a decline in client confidence in the bank are some causes of banks’ liquidity issues. Managing asset-liability duration incorrectly might potentially result in financial issues. This happens when a bank has an excessive amount of short-term liabilities in comparison to short-term assets.

Customer deposits or short-term GICs are examples of short-term liabilities that the bank must pay out to clients. A bank may experience an asset-liability duration mismatch if its assets are invested in long-term loans or other obligations.

Regulations are in place to reduce liquidity issues. They call on banks to maintain a sufficient level of liquid assets to last for a while without the influx of outside capital.

Now that we are done discussing risk management in banks, we would like to tell you about our central banking study material Nov 2022 that we have for you.

CENTRAL BANKING STUDY MATERIAL NOV 2022

The CAIIB exam in November 2022 will soon be here, thus, our specialists have put together an excellent Central Banking study material for 2022. One of the tools on the market that candidates utilize the most frequently will be this one. According to the most recent CAIIB Central Banking syllabus Nov 2022, CAIIB Central Banking materials are revised. Our CAIIB Central Banking study material for November 2022 will provide a range of services, including:

  • Recorded video lectures, which can be downloaded offline, will be available soon. 
  • Live sessions will also be available soon. 
  • Classes will start on YouTube, the dates for the same will be released soon. 
  • These lectures would be a mixture of Hindi and English languages for your better understanding. 
  • Along with these lectures,  complimentary short and easy notes in the form of ePDFs will be available soon, which you will be able to access on our apps. 

Keep in mind that all of these details about the CAIIB central banking study material for 2022 are tentative and subject to change. The announcements for the classes and study materials will all be issued soon. Please stay tuned.

I hope this article was helpful to you.

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