Module: | MODULE B: RISK MANAGEMENT
Q276: Consider the following statements regarding the fundamental nature of risks in the banking business:
1. Financial risks involve the direct potential for monetary loss due to market variables, credit defaults, or liquidity shortages.
2. Non-financial risks, such as operational or strategic risks, do not have the potential to impact the core capital of a bank.
3. Reputational risk is classified as a non-financial risk, which can indirectly trigger severe liquidity crises.
Which of the statements given above is/are correct?
2. Non-financial risks, such as operational or strategic risks, do not have the potential to impact the core capital of a bank.
3. Reputational risk is classified as a non-financial risk, which can indirectly trigger severe liquidity crises.
Which of the statements given above is/are correct?
✅ Correct Answer: B
The correct answer is B. Statement 1 is correct: Financial risks in banking directly threaten the financial viability of the institution and include Credit Risk, Market Risk, and Liquidity Risk, all of which directly result in monetary loss.
Statement 2 is incorrect: Non-financial risks, including Operational Risk, Strategic Risk, and Compliance Risk, absolutely have the potential to severely impact the core capital of a bank through massive regulatory fines, legal settlements, and business disruption.
Statement 3 is correct: Reputational risk is a non-financial risk, but a sudden loss of public confidence can lead to a "bank run" where depositors rapidly withdraw funds, instantly triggering a catastrophic liquidity crisis.
Statement 2 is incorrect: Non-financial risks, including Operational Risk, Strategic Risk, and Compliance Risk, absolutely have the potential to severely impact the core capital of a bank through massive regulatory fines, legal settlements, and business disruption.
Statement 3 is correct: Reputational risk is a non-financial risk, but a sudden loss of public confidence can lead to a "bank run" where depositors rapidly withdraw funds, instantly triggering a catastrophic liquidity crisis.