Distinguish between the 3 factors of financial risk as it pertains to the banking industry.

The banking industry is particularly vulnerable to financial risk due to its reliance on the movement of capital. This means that any changes in economic conditions or market volatility can have a significant impact on the sector as a whole which is why it is important to be aware of the three main factors involved.

The first factor is credit risk, which pertains to losses incurred due to borrowers failing to repay their loans. The second is liquidity risk, which refers to an institution’s inability to meet its financial commitments when needed due to inadequate cash flow or lack of assets that can be easily converted into cash. Finally there is market risk, which encompasses any potential losses resulting from fluctuations in security prices or other investments held by banks.

By understanding how these three factors interact with each other it becomes easier for banks and other financial institutions identify potential risks and take steps mitigate them before they become serious issues. In this way organizations can better ensure long-term sustainability while still creating value for their customers and shareholders alike.