Fundamentals of Banking Operations
3. Risk and Regulatory Framework
3.2. Credit Risk, Liquidity Risk & Operational Risk
Risk management is central to banking stability.
1. Credit Risk
Risk of borrower default.
Mitigation:
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Collateralization
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Credit scoring models
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Loan diversification
2. Liquidity Risk
Risk that a bank cannot meet short-term obligations.
Mitigation:
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Maintaining cash reserves
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Asset-liability matching
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Interbank borrowing
3. Operational Risk
Loss arising from internal failures, fraud, or system breakdowns.
Mitigation:
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Internal controls
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Segregation of duties
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IT security frameworks