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Systematic & Unsystematic Risks Market Risk I. Liquidity Risk Liquidity Risk and Performance of The Banking System

This document discusses three research studies about risks in the banking system: 1. A 2011 study of Pakistani banks found that non-performing loans and liquidity gaps negatively impacted bank profitability by increasing liquidity risk. Mitigating liquidity risk through adequate cash reserves and minimizing liquidity gaps can improve bank performance. 2. A 2000 UK study found that operational risks from insurance operations caused large losses in retail banks due to risk concentrations. The study concluded operational risk can be reduced through improved documentation and management policies. 3. A 1989 study evaluated that credit risk for financial institutions arises from counterparty default risk. The study concluded credit risk can be mitigated by diversifying loan and contract portfolios and considering counterparty

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809 views

Systematic & Unsystematic Risks Market Risk I. Liquidity Risk Liquidity Risk and Performance of The Banking System

This document discusses three research studies about risks in the banking system: 1. A 2011 study of Pakistani banks found that non-performing loans and liquidity gaps negatively impacted bank profitability by increasing liquidity risk. Mitigating liquidity risk through adequate cash reserves and minimizing liquidity gaps can improve bank performance. 2. A 2000 UK study found that operational risks from insurance operations caused large losses in retail banks due to risk concentrations. The study concluded operational risk can be reduced through improved documentation and management policies. 3. A 1989 study evaluated that credit risk for financial institutions arises from counterparty default risk. The study concluded credit risk can be mitigated by diversifying loan and contract portfolios and considering counterparty

Uploaded by

sabihuddin
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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1.

Systematic & Unsystematic Risks


Market Risk
I. Liquidity Risk
Liquidity Risk and Performance of the Banking System
(Khan1, 2011) examines that the potential causes of liquidity risk in Pakistani banks
and evaluates their effect on banks profitability. The research study displays an empirical
relationship between factors of liquidity risk and their effect on the profitability of the banking
sector. A SPSS Multiple regression is applied on data to assess the impact of liquidity risk on
banks profitability. Results indicate that liquidity risk directly impact on the profitability of
banks. The two main factors that exacerbate liquidity risk identified from this research are Nonperforming loan and liquidity gap. These factors give negative impact on banks profitability.
Financial performance is measured through calculating profitability ratios such as Gross profit
margin which depicts the financial performance of banks. This research study highlights the
problem of liquidity risk faced by the banking sector. in Pakistan. Therefore, the research study
enables in comprehending certain aspects of liquidity risk and their effect on the profitability of
the banking industry. Liquidity risk can be mitigated by having adequate cash assets. In this
manner, liquidity gap minimizes and decrease dependence on repo market.

Mitigating Operational Risk in Britain Banks


(Blacker, 2000) stated that operational risks appears as a threat for business activities and day-to
day operations in Banks. The research study shows that the insurance operations in Retail Banks
of Britain lead to enormous losses as a result of risk concentrations. The objective of this
research study is that operational risk can be mitigated through proper
documentation and efficient management policies.

Assessing Credit Risk in a Financial Institution's Off-Balance Sheet


Commitments
(Hull, 1989) evaluates that credit risk arise from the possibility of default by the counterparty. It
is perceived that credit risks cannot usually be hedged. It is credit risks that are the main concern
of this research study. High credit risk means that the Bank has taken high amount of credit
which may lead to bankruptcy. Hence, it is important to mitigate credit risk in financial
institutions. This research paper concludes that credit risk can be mitigated by every bank has a
very large portfolio of loans and off-balance sheet contracts, that the future exposures on two
different contracts are independent, and that the exposure on any given contract is independent of
the probability of bankruptcy. The appropriate weight for an off-balance sheet contract is likely
to depend on the size of bank, the other contracts in the bank's portfolio, and the objectives of the
counterparty when it entered into the contract.

References
Blacker, K. (2000). Mitigating Operational Risk in British Retail Banks. Palgrave Macmillan Journals,
23-33.
Hull, J. (1989). Assessing Credit Risk in a Financial Institution's Off-Balance Sheet Commitments. The
Journal of Financial and Quantitative Analysis, 489-501.
Khan1, M. K. (2011). Liquidity Risk & Performance of the Banking System. Journal of Banking &
Finance.
McAlister, L. (Jan., 2007). Advertising, Research and Development, and Systematic Risk of the Firm.
Journal of Marketing,, 35-48.

2. Effect of Internal Audit on Traditional & Risk based


practices
India, Bangladesh, UK, China

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