Explain risk management to your new staff. Distinguish between the 3 factors of financial risk as it pertains to the banking industry.

sources of financial risk | Business & Finance homework help

Risk management is a process of identifying potential risks and developing strategies to mitigate them. In the banking industry, financial risk can be divided into three main categories: credit risk, market risk, and operational risk. Credit risk refers to the possibility of losing money due to a borrower’s inability or unwillingness to fulfill their contractual obligations; this could include loan defaults, bankruptcies, etc. Market risk pertains to losses incurred by investments that perform below expectations due to changing economic conditions. Lastly, operational risk involves any unexpected losses due to internal errors or weaknesses such as incorrect processing of customer orders or inadequate fraud monitoring systems.

By understanding these different types of financial risks associated with banking operations and implementing effective tools for managing them—such as stress tests or contingency plans—banks are better equipped to maintain profitability while ensuring customer trust in their services which is essential for success in the long term.