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Showing posts with label legal risk. Show all posts
Showing posts with label legal risk. Show all posts
Sunday, 22 July 2018
Monday, 7 March 2016
The Different Types of Risks Faced by Banks
By Stanley Epstein -
Banks face a number of different types of risks in their day-to-day business activities. These different risk types and how they arise are not always clearly understood by the public at large, often giving rise to many misconceptions. This article serves to clarify what these risks are and what gives rise to them.
ooOOOoo
Since the 2008 financial crisis and its aftermath, just putting the words “risk” and “bank” together conjures up the image of a monolithic bank rampaging through the economy wreaking havoc as it goes.
This image is of course totally unfair. Banks, like any other firm or even individuals are exposed to many different forms of risk. Banks too, in their own right, are a source of a number of risks as well. However this is outside of our present scope.
This article will explain what risk is and some of the different types of risk that banks and other financial institutions are exposed to in their everyday business activities.
Let us start our journey with a visit to the dictionary. Once upon a time this meant a trip to the bookshelf, but today thanks to the wonders of technology the “word” is at ones fingertips. The definition of “Risk” being “exposure to the chance of injury or loss” is typical (with thanks to Dictionery.com).
There may be other variations on this theme, but what we have is good enough. The key elements of “risk” are EXPOSURE to the CHANCE of LOSS. In other words the possibility that something will cause a financial or other loss. This is the basis for understanding the different types of risks that banks face.
Let us take a look at a typical bank. In its very simplest form, banks take in deposits and lend this out in the form of loans. Should the borrower not repay his or her loan the bank is faced with Credit risk. This is the possibility that a borrower will be unable to make payment of the amount due. Credit risk is absolute. It’s the chance that the borrower will never be able to repay the loan. Credit Risk implies bankruptcy.
Liquidity risk is on the other hand not absolute. It is the possibility that a borrower will be unable to make payment of the amount due at the time that it is due. However the reason for this could be timing issues. In other words he is “illiquid” on the payment due date. It does not imply that the borrower is insolvent as he may be able to repay the loan at a later time.
Between them, Credit risk and Liquidity risk are the major business risks that banks face because they are part and parcel of the business of banking (the loaning out of money).
In recent years there has been a growing realization that Operational risk is another source of danger to a bank. This was given voice and form in the Basel Accords, where Operational Risk has been defined as “the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events”.
Operational risk can be subdivided into seven distinct categories. In what follows we examine each of these categories and briefly explain what types of risks they cover.
Internal Fraud. Generally this covers fraud by bank staff such as the stealing of assets, theft of client information, covering up errors, intentional mismarking of positions, bribery etc.
External Fraud. Where non-bank staff are involved such as in computer hacking, third-party theft, forgery.
Employment Practices and Workplace Safety. Discriminatory staff policies, workers compensation claims, employee health and safety issues.
Clients, Products and Business Practice. This is a very wide field and generally covers market manipulation, antitrust issues, improper trading activities, bank product defects, fiduciary breaches, account churning. The sub-prime Mortgage debacle is a clear example of a product defect.
Damage to Physical Assets. This covers things like natural disasters, terrorism and vandalism – anything that results in actual damage or destruction of the bank’s physical assets.
Business Disruption and Systems Failures. Power failures, computer software and hardware failures. A hurricane or a flood that results in banking services being disrupted also falls into this category.
Execution, Delivery and Process Management. This covers things like data capture errors, accounting errors, failure to meet legal reporting requirement, negligent loss of client assets.
There are other risks too, such as legal, reputational, market – the list goes on. But that is another story (and perhaps another article).
Labels:
banking,
credit risk,
legal risk,
liquidity risk,
operational risk
Saturday, 15 August 2015
BlueCrest Sued in U.S. as Libor Fallout Ensnares Hedge Fund
From Bloomberg –
“BlueCrest Capital Management was sued by a group of investment firms over claims an employee at the hedge fund run by billionaire Michael Platt conspired with banks to rig the Swiss franc Libor rate.
The allegations closely follow information disclosed by the New York Department of Financial Services in April as part of a record $2.5 billion fine against Deutsche Bank AG. The lawsuit cites a transcript released by regulators that indicated a BlueCrest employee asked a Deutsche Bank director to contribute a low interest rate to Libor submissions.
BlueCrest and other defendants “rearranged their Swiss franc Libor-based derivatives desks to encourage cooperation among traders,” investors said in the lawsuit filed June 19 in federal court in Manhattan.”
Read more>>
Labels:
derivatives,
legal risk,
LIBOR,
rate rigging,
US
Thursday, 3 April 2014
Where is Bitcoin Legal
From CNN
“In most countries around the world, Bitcoin is neither illegal nor totally unregulated. It's somewhere in between.
The map (see link below) shows where every country stands on Bitcoin as of last week. Most nations appear in blue or gray, which means you can use bitcoins there.
Bitcoin and similar virtual currencies are computerized money not backed by any official authority. Governments haven't given it their blessing, and they're trying to figure out how to deal with it.”
INTERACTIVE MAP>>
The map (see link below) shows where every country stands on Bitcoin as of last week. Most nations appear in blue or gray, which means you can use bitcoins there.
Bitcoin and similar virtual currencies are computerized money not backed by any official authority. Governments haven't given it their blessing, and they're trying to figure out how to deal with it.”
INTERACTIVE MAP>>
Labels:
Bitcoin,
crypto-currency,
law,
legal risk,
money,
regulation,
regulators
Tuesday, 25 February 2014
Madoff jailhouse interview used to bolster NY suit
From The Washington Post
“A new lawsuit against JPMorgan Chase & Co. relied on a jailhouse interview with Bernard Madoff to bolster claims that top executives at the nation’s largest bank for many years confronted Madoff about significant concerns in filings with a regulatory agency regarding his private investment business but always backed off because he earned the bank so much money.
In the lawsuit filed Thursday in Manhattan federal court, lawyers for two pension funds quoted Madoff from an in-person interview conducted last fall in Butner, N.C., where Madoff is serving a 150-year prison sentence, as well as telephone interviews conducted with him.”
read more>>
“A new lawsuit against JPMorgan Chase & Co. relied on a jailhouse interview with Bernard Madoff to bolster claims that top executives at the nation’s largest bank for many years confronted Madoff about significant concerns in filings with a regulatory agency regarding his private investment business but always backed off because he earned the bank so much money.
In the lawsuit filed Thursday in Manhattan federal court, lawyers for two pension funds quoted Madoff from an in-person interview conducted last fall in Butner, N.C., where Madoff is serving a 150-year prison sentence, as well as telephone interviews conducted with him.”
read more>>
Labels:
fraud,
JPMorgan,
law,
legal risk,
Madoff
Sunday, 2 February 2014
Lawsuit claims professor cut out of Square's original patent
“A St. Louis professor has sued mobile payments company Square, arguing that he originally came up with the concept and first technology for a credit card-reading dongle, yet was denied any formal credit or equity.
In the lawsuit, which was first reported by The New York Times, Washington University professor Robert Morley said that he came up with Square's signature product, the dongle that allows almost anyone with a smartphone or tablet to take credit card payments, as well as developed the first version of the technology. Morley also said he was denied founder's credit or any equity in Square.”
read more>>
Labels:
banks,
legal risk,
mobile payments,
retail payments,
Square
Monday, 16 September 2013
Why Banks Became Law Enforcement 'Deputies'
From American Banker
“Financial institutions are required to thoroughly "know" their customers and vet transactions for potential criminal connections in a way that other critical service industries are not. (Imagine an electric company quizzing its customers about what appliances they plug into the wall.) Ellen Zimiles, a former assistant U.S. attorney who now heads the global investigations and compliance practice at Navigant Consulting, explains why banks have been given special responsibilities.”
watch video>>
“Financial institutions are required to thoroughly "know" their customers and vet transactions for potential criminal connections in a way that other critical service industries are not. (Imagine an electric company quizzing its customers about what appliances they plug into the wall.) Ellen Zimiles, a former assistant U.S. attorney who now heads the global investigations and compliance practice at Navigant Consulting, explains why banks have been given special responsibilities.”
watch video>>
Labels:
banking,
banks,
compliance,
KYC,
legal risk
Friday, 13 September 2013
Digging into regulation: guidance or law?
From ABA Banking Journal
“Industry regulation resembles an exercise in archaeology or geology. Not only are many products and activities regulated, there is also layer upon layer of regulatory documents. Some layers can be more significant than others. And others can be mistaken for, or misrepresented as, something they are not.
Some layers are laws. When Congress passes an act and the President signs it, the resulting law contains provisions that require or prohibit certain actions—or set limits. Once something becomes a law, it defines the borders of what banks can or cannot do.
Laws tend to be vast—and often vague—in addressing specific problems or activities.
For example, it is one thing to require disclosure of finance charges. It is quite another to figure out precisely what constitutes a finance charge. It is one thing to require reporting of suspicious activity. It is quite another to figure out what constitutes suspicious activity and how the report should be prepared and filed.
This is where regulations come in.”
read more>>
“Industry regulation resembles an exercise in archaeology or geology. Not only are many products and activities regulated, there is also layer upon layer of regulatory documents. Some layers can be more significant than others. And others can be mistaken for, or misrepresented as, something they are not.
Some layers are laws. When Congress passes an act and the President signs it, the resulting law contains provisions that require or prohibit certain actions—or set limits. Once something becomes a law, it defines the borders of what banks can or cannot do.
Laws tend to be vast—and often vague—in addressing specific problems or activities.
For example, it is one thing to require disclosure of finance charges. It is quite another to figure out precisely what constitutes a finance charge. It is one thing to require reporting of suspicious activity. It is quite another to figure out what constitutes suspicious activity and how the report should be prepared and filed.
This is where regulations come in.”
read more>>
Labels:
bank regulation,
banking,
banks,
law,
legal risk
Wednesday, 27 March 2013
What we are reading … 27th March 2013
Operational Risk Management...: Legal Risk: Over-The-Horizon Digital Radar... http://shar.es/e9rxk
Expansion of FedACH SameDay Service http://www.finextra.com/Community/FullBlog.aspx?blogid=7486
Starbucks Execs Respond To Square Criticism: Innovation Is Messy http://shar.es/eOSP6
Mobile Commerce on the Rise in Asia/Pacific, Says MasterCard Survey http://twb.io/Y1uwK1
Pros and Cons of Mobile Banking http://dld.bz/cs8ee
Focus on the Customer Today to Create the Bank of Tomorrow http://dld.bz/cs8ed
The Cyprus bail-out: A better deal, but still painful http://econ.st/ZjnrDJThe Boy Genius Report: Apple's billion dollar mobile payment magic trick http://dld.bz/cs8dQ
Expansion of FedACH SameDay Service http://www.finextra.com/Community/FullBlog.aspx?blogid=7486
Starbucks Execs Respond To Square Criticism: Innovation Is Messy http://shar.es/eOSP6
Mobile Commerce on the Rise in Asia/Pacific, Says MasterCard Survey http://twb.io/Y1uwK1
Pros and Cons of Mobile Banking http://dld.bz/cs8ee
Focus on the Customer Today to Create the Bank of Tomorrow http://dld.bz/cs8ed
The Cyprus bail-out: A better deal, but still painful http://econ.st/ZjnrDJThe Boy Genius Report: Apple's billion dollar mobile payment magic trick http://dld.bz/cs8dQ
Labels:
ACH,
bank,
banking,
Cyprus,
EU,
euro crisis,
legal risk,
mobile banking,
mobile payments,
mobile shopping,
operational risk,
Starbucks
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