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Risks Facing Commercial Banking Essay

610 words - 3 pages

Risks Affecting Commercial Banks:-
Commercial banks considered as one of the main financial intermediaries in the market, therefore the factors that occurred a negative results on the commercial banks has a strongly affect upon the economic condition and securities markets as well, the risks factors that are affecting the commercial banks can be as the following :-

Risks of Interest Rates:-
The risk factor that's the most widespread is interest rate for the commercial banks, but commercial banks are proficient at reducing the risk of interest rates by hedging their loans against any kind of variations in the curve of interest rates in economy.
To clarify the image more better to give a simple example on this, assume that one bank is making a business loans and the borrower is charged by 5%, keep in mind the current interest rate level is at 2%, so ...view middle of the document...

When borrower is unable to pay this will make default on loan, and this will cause money losses for the bank, the more number of defaults borrowers the more risks and the more percentage of solvency of the bank.

Risks of Regulation:-
Commercial banks are controlled by regulations; they are following a certain framework of legal regulations according to the type of the bank, in which state they operating this bank and the specialization. When regulations changed the operational frame work of the bank will change as a respond to that, this has a strongly impact on the bank's ability in generating profits from loans.

Opportunity Cost Risks:-
As known commercial banks all their operations are mostly depending on loans, but they might decrease the amounts of lending for fear of high percentages of default. In case that the financial analysis of the bank expects diminished in economic activity, then the commercial dank has to be ready for the reduction of borrower payments. When the default rates are high, this will lead the bank to prefer investing with a portion of the capital, in order to make money of profits from the successful loans.

Risk of Deposits:-
Customers deposits, this what commercial rely on partly, so the commercial bank will be able to fund bank investments and loans. Many commercial banks are providing traditional services of banking, that included deposit and checking certificates, accounts of savings and money market. Adding to that and to make it much attractive to depositors, the bank may increase the payments of interest rates on those accounts. If the deposit fund flow is not constant, for sure commercial banks wouldn't be able to go on at an optimal level.

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