Managing Financial Risks Quiz

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What risk does a net borrower face with increasing interest rates?

Inflationary risk

Decreased profitability (correct)

Increased purchasing power

Foreign exchange risk

What is the main concern related to inflationary risk?

Currency devaluation due to inflation (correct)

Increased purchasing power

Rising interest rates

Desirability of investing in securities

How does foreign exchange risk affect a bank's cash flows?

Increases future cash flows

Negatively impacts future cash flows (correct)

Has no impact on future cash flows

Stabilizes future cash flows

What characterizes unsystematic risks in an organization?

Controllable by nature Signup and view all the answers

Which risk arises when the value of assets or income decreases due to inflation?

Inflationary risk Signup and view all the answers

What is the main concern for a net lender with reducing interest rates?

Increased profitability Signup and view all the answers

What is the main purpose of managing risks according to the text?

To identify potential risks in advance and reduce their financial impact Signup and view all the answers

Which type of risks are uncontrollable from an organization's perspective and are macro in nature?

Systematic Risks Signup and view all the answers

What does 'Market Risk' mainly consist of?

Adverse movements in market prices Signup and view all the answers

How can 'Market Risk' be described in terms of investments?

Unavoidable risk Signup and view all the answers

What type of risk is associated with the variability of interest rates?

Interest Rate Risk Signup and view all the answers

Which regulatory body mentioned in the text highlights market risk as arising from trading book positions?

European Banking Authority Signup and view all the answers

What is liquidity risk?

The risk of not being able to meet short-term debt obligations Signup and view all the answers

How is credit risk defined?

The risk associated with counterparty not returning borrowed amounts or not paying on time Signup and view all the answers

What could signal liquidity risk in the market?

Large price movements and unusually wide bid-ask spreads Signup and view all the answers

How does liquidity risk impact individuals or businesses?

By creating issues in meeting short-term debt obligations Signup and view all the answers

What is the consequence of credit risk not being managed effectively?

Additional expenditure on following up and recovering debts Signup and view all the answers

Why is credit risk potentially detrimental to a company's liquidity?

It might cause additional expenses in recovering funds Signup and view all the answers

What is one reason mentioned in the text for making systems simpler?

To decrease the area vulnerable to attack Signup and view all the answers

How many regulatory changes did banks have to face in 2016?

51,600 Signup and view all the answers

What is the snowball effect mentioned in the text related to regulations?

Increasingly precise technical specifications Signup and view all the answers

Which term refers to all reprehensible behavior that can lead to penalties according to the text?

Conduct Signup and view all the answers

What is a major challenge faced by banks due to the global climate mentioned in the text?

Increasingly specific regulations in each zone Signup and view all the answers

What is one area where banks are at the forefront, according to the text?

Regulatory compliance Signup and view all the answers

What is an example of a frequent operational risk IT incident?

A partner leaving with their client portfolio Signup and view all the answers

Which situation represents a proven serious operational risk?

Operational losses linked to risky financial investments Signup and view all the answers

In the context of banks digitizing their services, what are 'cyber risks' closely monitored by?

The European Central Bank Signup and view all the answers

What is required of banks in relation to notifying cyber incidents?

Notify the European Central Bank of all cyber incidents Signup and view all the answers

Why have European banking supervisors made cyber risks one of their top priorities?

Due to the increasing digitization of banking services Signup and view all the answers

What are banks technically required to do regarding their information systems, according to the text?

Simplify their information systems Signup and view all the answers

Study Notes

Financial Risks

A company being a net borrower would see increasing interest rates as a risk, whereas if it is a net lender, reducing interest rates would be the risk, as profitability drops.

Inflationary Risk

This risk originates from the fact that the purchasing power is exposed to a downfall.
The possibility that the value of assets or income will decrease as inflation shrinks the purchasing power of a currency.
Inflation causes money to decrease in value, whether invested or not.

Foreign Exchange Rate Risk

This risk corresponds to the risk of losses related to fluctuations in exchange rates.
Any unfavorable exchange rate fluctuations could negatively impact future cash flows expected by the bank as a result of its financial activity on currencies.
Foreign exchange risk may also impact the credit activities of the bank, particularly when lending money to clients in foreign currency.

Systematic Risks

These risks are due to factors that are uncontrollable from an organization's purview and are macro in nature.

Market Risk

Market risk is comprised of the “unknown unknowns” that occur as a result of everyday life.
It is unavoidable in all risky investments.
Market risk can be defined as the risk of losses in on and off-balance sheet positions arising from adverse movements in market prices.

Interest Rate Risk

It is the risk that arises due to the variability of interests from time to time.
Lending and borrowing is associated with interest rate, and changes in interest rate cause interest rate risk to the company.

Liquidity Risk

Liquidity is the ability of a firm, company, or even an individual to pay its debts without suffering catastrophic losses.
Conversely, liquidity risk stems from the lack of marketability of an investment that can't be bought or sold quickly enough to prevent or minimize a loss.

Credit Risk

If you owe $100, it is your problem, but if you owe $100 million, it is the bank's problem.
Credit risk gives rise to additional expenditure on following up and recovering, and not paying on time could cause liquidity issues in the company.

Operational Risk

IT incidents that temporarily prevent agents from doing business
Error in the IT configuration of commissions
A partner leaves with their client portfolio; knowledgeable people leave the company without having transmitted their knowledge
Failure to meet delivery deadlines in product design

Serious Operational Risk

A computer server fire that paralyzes the whole company
A hundred-year flood of the Seine that affects the company's offices
A pandemic affects a large number of company employees and prevents business continuity

Proven Serious Operational Risk

Linked to the deficiency in internal control: non-separation of powers, poor supervision of employees or non-compliance with processes.

Cyber Risks

Closely monitored by the European Central Bank in charge of supervising banks.
Banks are supposed to notify ECB all Cyber incidents.

Acceleration of Regulatory Constraints

Continuation of a regulatory avalanche while the financial gendarmes of the planet are trying to finalize Basel III.
Banks had to face 51,600 regulatory changes in 2016, an average of 200 per day.

Acceleration of Punishment Fees from Regulators

Regulators are exploring new fields of action, such as that relating to Conduct -> all reprehensible behavior that can give rise to penalties.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

Test your knowledge on managing financial risks, including identifying potential risks, reducing financial impact, and understanding different types of risks. Learn about systematic risks, market risks, and more.