Strategic Risk in E-Banking

This is the current and prospective risk to earnings and capital arising from adverse business decisions or improper implementation of business decisions. Many senior managers do not fully understand the strategic and technical aspects of Internet banking. Spurred by competitive and peer pressures, banks may seek to introduce or expand Internet banking without an adequate cost-benefit analysis. The organization structure and resources may not have the skills to manage Internet banking. In other words, will the bank get it right? Will it make the right choices when it comes to investing in e-banking or will it waste money by going down a technological blind alley? Should it attempt to take the lead in new technology ahead of its competitors, or should it be a follower and adopt a “wait and see” approach? The latter may be the safer course of action for smaller banks, though it does create the riskContinue reading

Credit Creation by Commercial Banks

Credit creation is the most significant function of the commercial banks. Commercial banks accept deposits and lend loans and advances. In this process they create two types of deposits, namely primary deposits and derivative or active deposits. The former refers to the cash deposited by a customer in a bank or deposit a cheque with the bank for collection. The banker merely accepts cash am converts it into a deposit. Hence, this is merely a passive role performed by the banks. These primary deposits do not add to the money stock in the economy. From their experience and observation the banks know that not all the customers will withdraw their deposits on any single day. Hence, after providing for some reserve to meet the cash requirement of the depositors, the banks lend the balance to the borrow. The amount of reserve to be maintained by the banks is Cash ReserveContinue reading

Market Risk Management in Indian Banks

Traditionally, credit risk management was the primary challenge for banks. With progressive deregulation, market risk arising adverse changes in market variables, such as interest rate, foreign exchange rate, equity price and commodity price has become relatively more important. Even a small change in market variables causes substantial changes in income and economic value of banks. Market Risk may be defined as the possibility of loss to a bank caused by the changes in the market variables. It is the risk that the value of on/off-balance sheet positions will be adversely affected by movements in equity and interest rate markets, currency exchange rates and commodity prices. Market risk is the risk to the bank’s earnings and capital due to changes in the market level of interest rates or prices of securities, foreign exchange and equities, as well as the volatilities of those prices. Market Risk management provides a comprehensive and dynamicContinue reading

The Importance of Credit Risk Management in Banking

Credit risk implies a potential risk that the counterparty of a loan agreement is likely to fail to meet its obligations as per the original loan agreement, and may eventually default on the obligation. Credit risks can be classified into many forms such as options, equities, mutual funds, bonds, loans, and other financial issues as well, which in extensions of guarantees and the settlement of these transactions. Is it Important for the Banks to Manage their Credit Risks? Risk is always associated with banking activities, and taking a risk is an important part of any banking operation, there is hardly any banking operation without the risk. Most of the bankers are said to be sound when they have a clear overview of what is the amount of risk involved in the current transaction and they make sure that some of the partly earnings are therefore kept for these risks. TheContinue reading

Classification of Bank Payement Systems

Payment systems can be classified on the basis of the value of transactions being put through them, settlement modality or on the basis of timing of settlement. Value of funds transfer: payment systems can be categorized into (a) Large-value funds transfer — where individual payments are of high value and therefore time sensitive and (b) Retail funds transfer — where the value of transactions are of relatively low individual value but the volume of transactions put through it large. Settlement modality: payments systems can be classified into (a) Net settlement where payments are set off against receipts over a large number of transactions taken up for settlement. This arrangement can be on a bilateral basis between two participants or on a multilateral basis amongst all participants and (b) Gross Settlement — where each transaction is settled independent of other transactions. Timing of settlement: payment systems can be classified as (a)Continue reading

Different Types of Risks Faced by Banks Today

All companies which have a profit maximizing objective hold a certain degree of risk whether through microeconomic or macroeconomic factors. Banks also face a number of risks atypical of non financial companies due to the payment and intermediary function which they perform. Recent changes in the banking environment has lead to an increased pressure to maximize shareholder value, this means that banks take on a higher risk in order to gain a higher return. It is due to this increased pressure and market volatility that banking risk needs such effective management to ensure the banks continued solvency. Risk can be defined as an “exposure to uncertainty of outcome” measured by the volatility (standard deviation) of net cash flow within the firm. Banks aim to add equity to the bank by maximizing the risk adjusted return to shareholders highlighting the importance of fully considering the risk and return business equation. ExposureContinue reading