Managing Financial Risks Quiz

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.