Business Risks Articles

Business Risks of Financial Activity

Enterprises face financial risks when they deal with financial institutions. As a rule, the latter include banks or investment funds. Financial risks arise for both the companies and banks.

Causes of Financial Risks

Inflation

Inflation is one of the most common reasons. This risk factor is virtually uncontrolled. Inflation can destroy the whole business in countries with a fragile economic system.

Credit interest rate

Credit interest rates are another equally important source of financial risks.

Types of Financial Business Risks

  1. Risks related to the value of money;
  2. Risks associated with the investment activity.

 

Risks related to the value of money

Inflation risk reduces the value of money in time and does not allow purchase the same or larger volume of products or materials for the available funds. Inflation leads to the losses that are estimated as the difference in the value of money.

Currency risk deals with the volatility of exchange rates. The rates do not always change because of inflation. A set of international and global factors exerts a great influence on the volatility of exchange rates. It’s possible to reduce currency risks using several currencies for the company needs.

Liquidity risks relate to the ability of the company to sell its products or services. These risks also include losses from the impairment of securities.

Types of Investment Risks

The risk of the lost opportunity

This is a financial loss from the company’s non-participation in certain financial offers, for example, investing or insurance programs.

Risk of declining yield

This risk associates with a reduction in the interest rate of dividends or loans.

The risk of direct financial losses

The risk of direct financial loss includes the exchange risk, the risk of bankruptcy, etc.

Financial Risks of Banks

The management of financial risks mainly depends on the nature of banking products as well as the life cycle of a financial contract.

Types of banking products that affect financial risks:

  • loans to individuals
  • financing the investment programs of enterprises
  • urban bonds and government securities
  • interbank loans.

Minimization of Financial Risks for Banks

Banks should constantly monitor the risks associated with the possible changes in the relationships with their partners. To do this, they take the following measures:

  • identify partners
  • determine the limits of partner risks
  • control the financial payments of partners
  • develop rules, procedures and methods for mitigating risks.

Banks take into account international banking supervision rules to be able to control their own financial risks. In this regard, they perform the tasks as follows:

  • control over the availability of capital;
  • improving banking operations transparency
  • active use of internal risk control system.

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