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Banks are Risk Factories: An introduction to the Financial Risks from Banking
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- FormatePub
- ISBN8231969586
- EAN9798231969586
- Date de parution13/06/2025
- Protection num.pas de protection
- Infos supplémentairesepub
- ÉditeurWalzone Press
Résumé
Banks are key players in the financial economy and have an important function in our society. For example, banks create more than 90% of our money in the form of credit. Further, payments are executed by banks. This can be summarized as: no banks, no credit, money, no payments. Creating money and payments are essential to our economy and are considered to be 'utility functions'. These bank utility functions are known as commercial banking.
But banks also perform other activities, known as investment or merchant banking, such as arranging securities issue of shares and bonds for clients , giving advice on mergers and acquisitions and trading. For all these activities, banks are exposed to risks. The main financial risks are financial risks: interest risk, market risk, credit risk and liquidity risk. The profitability of banks highly connects with the exposure to financial risks.
To potentially increase profits, bankers take higher financial risks. But of course, these risks can also create losses. To absorb unexpected losses, banks hold a level of buffers: the economic capital. If these buffers are insufficient, the bank can default and cause a financial crisis. The 2008 credit crisis illustrated the potential devastating economic damage of such a financial crisis. Therefore, to avoid such a crisis, banks have to comply to a minimum buffer level, the regulatory capital, that is set by supervisors based on expert publications, for example the well-known Basel Accords published by the Basel Committee on Banking Supervision.
In summary: banks are risk factories and the main competence of a banker is to manage financial risk.
But banks also perform other activities, known as investment or merchant banking, such as arranging securities issue of shares and bonds for clients , giving advice on mergers and acquisitions and trading. For all these activities, banks are exposed to risks. The main financial risks are financial risks: interest risk, market risk, credit risk and liquidity risk. The profitability of banks highly connects with the exposure to financial risks.
To potentially increase profits, bankers take higher financial risks. But of course, these risks can also create losses. To absorb unexpected losses, banks hold a level of buffers: the economic capital. If these buffers are insufficient, the bank can default and cause a financial crisis. The 2008 credit crisis illustrated the potential devastating economic damage of such a financial crisis. Therefore, to avoid such a crisis, banks have to comply to a minimum buffer level, the regulatory capital, that is set by supervisors based on expert publications, for example the well-known Basel Accords published by the Basel Committee on Banking Supervision.
In summary: banks are risk factories and the main competence of a banker is to manage financial risk.
