First, there is credit risk. This refers to the losses that are incurred when borrowers fail to repay their loan. The second is liquidity risk, which refers to an institution’s inability to meet its financial commitments when needed due to inadequate cash flow or lack of assets that can be easily converted into cash. Market risk is the last type of risk. It includes any possible losses that may result from changes in prices for securities or other assets held by banks.
Banks and other financial organizations can identify and mitigate risks by understanding the interaction between these three factors. This allows organizations to create value both for customers and investors while ensuring long-term viability.