During my study on my Master Degree Risk Management course, I am facing below key questions from my Risk Management professor, can you please provide in-depth answers to below? (like around 200 words answers for each question)
1) Why banks are critical institutions especially from Risk Management perspective
2) What are the profitability landscape for banks after Lehman crisis, from Risk Management perspective
4) What are the key objectives of new regulations for derivatives
5) What are the Key functions in Global Market Value Chain, from Market Risk perspective
6) What are the Evolution in metrics for Market Risk?
7) What are the Risk mitigations for Counterparty Credit risk.
8) Differences between Market liquidity Risk versus Funding Liquidity Risk.
9) What are the root causes for liquidity problems in financial institutions during the financial crisis.
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1. Why banks are critical institutions especially from Risk Management perspective?
Banks are critical institution from a Risk Management perspective because of their unique position in the financial process. Banks make loans and control incentive. Problems in the market can be linked back to lax credit standards for borrowers and counterparties generated by banks (Coen, 1999). From a Risk Management perspective this can be devastating. Lax lending practices lead to deterioration in credit standing, thus risk is prevalent.
Other areas where banks operate include trade financing foreign exchange transactions, financial futures, swaps, bond, equities, options, in addition, the extension of commitments and guarantees. All of these activities lead to risk, and this risk is not merely sequestered to the bank alone. These activities and their consequences extend to borrowers and counterparties.
From a risk management perspective, the ideal banking approach would be stringent loan procedures, due diligence in making transactions, and accurate financial records. All of these practices translate into mitigated risk and potential profit.
From a Risk Management perspective banks are the gateway to a financial dam. Transparency, careful lending practices and financial focus all play a role in mitigating risk and thus make managing risk easier. A banks ability to diversify their holding across a broad spectrum tends to make risk less of an issue. There is always an element of risk in every financial situation but the bank is critical in its role of diminishing loss.
2. What are the profitability landscape for banks after Lehman crisis, from Risk Management perspective?
The profitability landscape for banks has certainly changed since the Lehman Brothers Bankruptcy Crisis. The filing consisted of losses in excess of 12 Billion Dollars (Investopidia Staff, 2016). One way that that profitability has changed derives from the way loans must be written. In addition, federal regulations have made it harder for banks to maintain inflated currency values on its loan. This in turn takes equity away from home value. The housing bubble of 2008 destroyed the banking community because repayment on housing loans faltered greatly (Shell, 2013). High-risk credit fueled a crash that devastated institutions like Lehman Brothers.
Now lenders are more selective in who they give loans to, and the basis of a loan is more stringent. This in turn decreases profits, but in turn increases long-term success rates. These success rates translate into secure revenue for the bank. From a Risk Management perspective this is more of a positive than a negative to the long-term success of the financial institution. The after-effects of the crisis have seen a healthier, stronger, and safer banking landscape. Banks undergo tough stress tests to assess what may happen if another financial downturn transpires. The good news from a Risk Management perspective is that these institutions regularly pass the test and are much better capitalized than they were before the recession (Zarroli, 2013).
3. What are the key differences between Forwards (OTC derivatives) and Futures (Exchanged Traded Derivatives), again.... from Risk Management perspective
The differences between Futures and Forwards are elementary on the surface. Futures are traded on exchanges while forwards are Over The Counter (OTC) derivatives. Both Futures and Forwards effectively meet Risk Management objectives in that they meet investing objectives, Chiefly, preserving value, limiting opportunity losses, and enhancing returns.
While similar Forward and Future contracts differ. Forward contract are quoted in the interbank market, conversely, Futures are traded in an exchange, and have many standardized features (Grabbe, 2016). Forwards are ...
This 2236 word document is fully referenced with 14 references. It covers nine questions. These questions cover risk management, liquidity, and global markets.