Different types of risks faced by a financial institution.
1. Residual risks:
Collaterals can pose the risks like legal and documentation risks.
2. Credit concentration risk:
Exposure in the same economic or geographic sector and/or in dependent industries
Exposure in the same economic or geographic sector and/or in dependent industries
3. Interest rate risk:
It in banking book has to be taken into account as a potential risk.
- Basis risk.
- Embedded option risk.
- Gap or mismatch risk.
- Net interest position risk.
- Net interest position risk.
4. Liquidity risk:
- Term liquidity risk.
- Withdrawal/call risk.
- Structural liquidity risk .
- Market liquidity risk.
5. Settlement risk:
It arises when an executed transaction is not settled 6. Reputation risk: It arise due to lack of compliance, customer-friendly service, fair market practices, failure to deliver on commitments, high costs, etc.
7. Strategic risk.
8. Environmental risk:
The uncertainty or probability of losses that originates from any adverse environmental or climate change events
9. Other material risks.
What do you mean by reputation risk? What type of losses may be induced in a bank due to reputation risk?
Reputation risk is the present or imminent circuitous danger to income and capital, decrease in the client base, immoderate suit emerging from antagonistic view of the banks' picture with respect to its partners. It may start from the absence of consistence with administration benchmarks, inability to convey on responsibilities, absence of client cordial administration and honest practices, preposterously high expenses, unseemly business conduct or unfavorable power sentiment and activities.
A few ways by which reputation risk can affect misfortunes for a firm / Bank:
A few ways by which reputation risk can affect misfortunes for a firm / Bank:
1. Loss of current or future customers, for example increased advertising costs are necessary to restrain reputation damage.
2. Loss of employees or managers within bank, an increase in hiring costs.
3. Reduction in current or future business partners.
4. Increased costs of financial funding .
5. Increased costs due to govt. policy, supervisory regulations fines or penalties.
5. Increased costs due to govt. policy, supervisory regulations fines or penalties.
Discuss the purpose of Market Discipline in relation with accounting disclosures under revised Regulatory Capital Framework for banks in line with Basel-II.
The purpose of market discipline in the overhauled ampleness system is to supplement the base capital necessities and the supervisory audit handle that the point is to build up more straightforward and more trained money related market with the goal that partners can evaluate the position of a bank in regards to holding of benefits and to distinguish the dangers identifying with the advantages and capital sufficiency.
1. It is expected that the disclosure framework does not conflict with requirement under accounting standard as set by central bank.
2. Under minimum capital requirement, banks will utilize indicated methodologies/techniques for measuring the different dangers they confronted and the subsequent capital prerequisites.
3. The disclosures ought to be liable to satisfactory acceptance, since data in the yearly money related explanations would for the most part be inspected and distributed.
What are the components of Tier-I & Tier-II capital according to Basel Accord?
The components of Tier-I & Tier-II capital according to BASEL accord are:
TIER-1 (core capital):
1. Paid up capital.
2. Non payable share premium account.
3. Statutory reserve.
4. General reserve.
5. Retained earning.
6. Minority interest to subsidiaries
7. Non cumulative irredeemable preference shares.
8. Dividend equalization account.
TIRE 2 (supplementary capital):
1. General provision (1% of CL)
2. Assets revaluation reserves
3. All other preference shares
4. Exchange equalization a/c.
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