An Introduction to Islamic Finance: Theory and Practice

(Romina) #1

Risk Management 277


Banks are subjected to a wide array of risks in the course of their opera-
tions, as illustrated by Table13.1. In general, banking risks fall into four
categories: fi nancial, operational, business, and event risks. Any of these risk
categories can be further divided into sub - categories.
Financial risks are subject to complex interdependencies that may signif-
icantly increase a bank’s overall risk profi le. For example, a bank engaged in
foreign currency business is normally exposed to currency risk, but will also
be exposed to risks such as liquidity, credit, and re - pricing if it carries open
positions or mismatches in its forward book. Operational risks are related
to a bank’s overall organization and the functioning of its internal systems,
including computer - related and other technologies; compliance with bank
policies and procedures; and measures against mismanagement and fraud.
Business risks are associated with its business environment, including macro-
economic and policy concerns, legal and regulatory factors, and the overall
fi nancial sector infrastructure such as payment systems and auditing profes-
sions. Event risks include all types of exogenous risks, which, if they were to
materialize, could jeopardize the bank’s operations or undermine its fi nan-
cial conditions and capital adequacy.


TABLE 13.1 Banking risk exposures


Financial risks Operational risks Business risks Event risks


Balance sheet
structure


Internal fraud Macro policy Political

Income statement
structure &
profi tability


External fraud Financial
infrastructure

Contagion

Capital adequacy Employment practices
and workplace safety


Legal infrastructure Banking crisis

Credit Clients, products and
business services


Legal liability Other
exogeneous

Liquidity Damage to physical
assets


Regulatory
compliance

Market Business disruption
and system failures
(technology risk)


Reputational &
fi duciary

Interest rate Execution, delivery and
process management


Country risk

Currency


Source: van Greuning (2008)

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