•
Liquidity risk. •
Rate risk.
• Exchange risk. •
Credit risk.
2-
Types of financial risks
The main types of financial risks are the following:
• The liquidity risk: it is the risk on the easiness to
buy or resell an asset. If a market is not fluid, you might
not find a buyer when you want to or not to find a seller when
you truly need one. It is a risk related to the nature of the
underlying (of the merchandise) but also to the credibility
of the buyer-seller. Indeed, it is easy to buy or to sell a
common product to a trustworthy counterpart, but it is more
difficult with a much specialised product. It is the liquidity
of this product. Moreover, if the buyer/seller is not credible,
the compensation risk for the potential suppliers/prospects
dissuades them from dealing.
The buyer/seller is in supply risk, in “liquidity”
risk. For a bank, it is the risk to be in the inability to face
a massive withdrawal of deposits by the customers.
•
Rate risk: it is the risk of loans-borrowings. It is the risk
that credit rates evolve in an unfavourably way. Thus, a borrower
with a variable rate undergoes a rate risk when rates increase
because he has to pay more. Conversely, a lender undergoes a
risk when rates decrease because he loses incomes. For a bank,
it is the risk that the market rates evolution lead to a remuneration
cost of deposits superior to the earnings generated by the interests
of granted loans.
• Exchange risk: it is the risk on the variations of legal
tenders between them. A risk noticeably related to time factor.
• Counterparty risk: it is the risk that the party with
which a contract has been closed does not keep its commitments
(delivery, payment, refund…). For a bank it is the risk
that its customers are unable to pay back their loans, or that
another bank, with which it has operations in progress (banking
correspondent), is defaulting.
• Country risk: if a country is in a serious crisis (war,
revolution, and stream of bankruptcy…) then even “trustworthy”
firms, despite their credibility are going to be in difficulty.
It is a counterparty risk related to the environment of the
counterparty. The country risk, strictly speaking, is the probability
that a country will provide the service of its outside debt.
Some countries can involve vulnerabilities toward international
investments. The analysis of vulnerability toward this kind
of risk becomes a necessity in the management of financial risks.
The International Monetary Fund dedicates work to the prevention
of crises in that field. The purpose is to improve the aptitude
to determine the vulnerability degree of the member countries
toward financial crises. Vulnerability indicators form an essential
part to these works. They bring a decisive contribution to the
supervision exercise and loans operations of the IMF.
Those indicators are used for analysis and resistance tests
in the evaluation program frame of the financial sector, and
also for early warning systems models (EWS).
