Lending has been dated back to centuries when risks were clear and transparent. Even just a few decades ago, the risks that bothered the sector were limited to Credit and Market Risks.
Credit risk is always a part of financing. It occurs when the banker doesn’t recover granted capital and potential return from the borrower. Basel-I was introduced in 1988 with a simplistic approach to regulate Credit Risk in banking.
Later came Operational Risk. Some banks went into debt or were sold out due to internal serious mismanagement. With Basel-II presented in 2007, a clear understanding of Operational Risk was formed.
In the 2007 financial crisis, the world got to witness not only the economic pitfalls of developed nations, but also the instability of large banks caused due to Liquidity Risk. It is another major risk keeping bankers on their toes.
Lately, the most talked about risk is Cyber Security Risk – not that cybercrime is unfamiliar to us, but the consequences of a system breach in banking sectors is severe and therefore unacceptable. It is a serious threat to companies and their customers as well.
Let’s have a closer look at Cyber Security Risk and Liquidity Risk that top every banking professional’s agenda due to their wide reaching threat and impact on the industry:
Cyber Security Risk – With banks evolving into highly-integrated computer networks – especially with mobile banking –security risks are expanding. Fraud, espionage, operational interruption and data obliteration are all part of cyber risks.
In 2012 and 2013, two banks from the Middle East, were subject to a multi million dollar cyber fraud. The offenders broke into third-party payment processors located in other countries to administer the infringement. Those episodes alerted banks all across the world, after which banking & consumer-lending software are now being designed with a more stringent framework.
While the vulnerabilities of banking software are targeted, inter connectivity is expanding, and the costs of cyber-security shields are also increasing. These are the key obstacles in operational risk management that bankers are currently struggling with.
How to Control Cyber Security Risk?
Cyber Security Risks can be mitigated by focusing on:
Insider flaw, threat & breach of periodic testing and detection.
Service provider administration.
Safe synchronization with other Banks & external networks.
Abiding by international & local Cyber laws and regulations.
The 2007 financial crisis is still taking a toll on banks and other financial institutions.
The inability to meet short-term financial needs has led banks to encounter long-term solvency issues. The market can be held responsible this time.
The risk occurs due to failure in trading security or an asset into cash without a loss. And an inefficient market contributes to a “no buying and no selling” condition.
A Quick Help:
Understanding the organization’s risk positions
It’s important to focus on long-term and short-term goals equally
Be prepared for crisis; have a backup
Have huge depositors retained and in hand
Robust management of Market, Credit and Operational Risks as they all are closely intertied to Liquidity Risk.
Bankers are innate risk managers identifying and evading unexpected risks that come their way.
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