An analysis of important market risk that international bank face
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Date
2017-02
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The British University in Dubai (BUiD)
Abstract
International banking can be beneficial, especially about developing a stable financial system. However, the international banking system also faces major problems. This paper attempts to identify market risks that exist in international banking and discuss on the risk management. It also discusses the importance of international banks managing these risks. The study used questionnaires as the methodology for collecting data. The questionnaires were distributed to 30 senior managers/officers in various international banks around the world. The questionnaire had three sections, with the first part requesting demographical information such as gender, age, education level, race and respondents’ judgments regarding the goals and importance of risk management practices as well as the where these market risks arise. The second part focused on obtaining insight about some of the market risks international banks face and how they are managed. The five-point Likert scale was used to rate individual factors. The third part of the questionnaire contained open-ended questions that sought to obtain more qualitative information from the bank officials regarding risk management techniques and their specific understanding and attitudes regarding the major market risks and practices used to manage them. From the data analysis, the study found that international banks face a narrow range of market risks mainly resulting from liquidity, interest rate and foreign exchange rate. The banks are not employing diverse risk management techniques and only focus on blunt tools for mitigating and eliminating market risks instead of employing advanced strategic techniques such as hedging, diversification and analysis of value at risk to manage market risks. The study provides recommendations that can address the issue, including improving counterparty credit assessment and transparency, improving counterparty risk management, reporting and estimation, improving market conventions and practices and regulatory reporting.
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Keywords
market risk, international banking, financial system, risk management