Sources of Financial Risk | Business & Finance homework help
The process of risk management involves identifying possible risks and developing strategies for mitigating them. The banking industry divides financial risks into three major categories: market risk (credit risk), operational risk (operational risk) and credit risk. Credit risk refers to the possibility of losing money due to a borrower’s inability or unwillingness to fulfill their contractual obligations; this could include loan defaults, bankruptcies, etc. Losses incurred from investments performing below expectations because of changing economic conditions are considered market risk. Operational risk is any loss that may occur due to errors made by the company or internal weaknesses, such as insufficient fraud monitoring or incorrectly processing customer orders.
By understanding these different types of financial risks associated with banking operations and implementing effective tools for managing them—such as stress tests or contingency plans—banks are better equipped to maintain profitability while ensuring customer trust in their services which is essential for success in the long term.