Analyzing Banking Risk: A Framework for Assessing Corporate by Hennie Van Greuning, Sonja Brajovic Bratanovic

By Hennie Van Greuning, Sonja Brajovic Bratanovic

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Extra resources for Analyzing Banking Risk: A Framework for Assessing Corporate Governance and Financial Risk, 3rd Edition

Example text

3). A s t he ba lance she et st ructure c hanges, i nherent r isks a lso c hange. T he structure of a ba lance sheet should therefore form part of an assessment of the adequacy a nd ef fectiveness of policies a nd procedures for ma naging r isk e xposures. In normal situations, the growth of a business’s assets is determined by an increase in the earnings base and access to stable external funding or investment, at a cost that is acceptable to the business. Businesses that grow too quickly tend to take unjustified risks, and their administrative and management information systems often cannot keep up w ith the rate of expansion.

Elements of the banking safety net i nclude the “ lender-of21 Analyzing Banking Risk last-resort” f unction a nd de posit-insurance fac ilities. T he s pecific f orm o f a banking safety net has significant implications for risk management. For example, the existence of lender-of-last-resort facilities—the main purpose of which is to provide temporary liquidity support to illiquid but solvent institutions— may weaken risk management incentives for banks, which tend to maintain less l iquidity a nd lend more when t hese fac ilities a re i n p lace.

In many countries, f inan- 22 Chapter 2: A Framework for Risk Analysis cial infrastructure may a lso include research institutes, f inancial advisory services, and similar establishments. Development of institutions includes forms and rules under which a particular financial institution can be incorporated and, on a broader scale, identifies its p otential com petitors. I ncreased com petition i n ba nking a nd f inance a nd the trend toward homogenization of banking business have been major factors that influence changes in national banking systems.

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