Banks,
being highly leveraged financial institutions that essentially
thrive on public trust, encounter many risks, the chief
ones being credit risk, operational risk and market
risk. For prudent management with high degree of transparency,
banks need to put in place a scientific system of measuring
and managing risks. Even the new Basel Accord emphasizes
this aspect quite categorically. Better risk management
is credited with having helped enhance the resilience
of the global financial system in the face of many challenges
encountered in recent years.
Systemic
disturbances could essentially arise and spread within
the banking sector, thus exposing the banks to the systemic
risk, adversely affecting not only bank lending but
also financial markets and market infrastructure like
payment and settlement systems.
Latin
American debt crisis (1982-83) has engulfed international
banks even though there was information available in
the public domain about the growing exposures of the
crisis countries. The question of interbank exposures
has been debated as a consequence. It is noticed that,
while netting can reduce the size of credit and liquidity
position incurred by market participants, which in turn
should help contain systemic risk, it may also obscure
exposure levels and multilateral netting may concentrate
risks, while raising legal enforceability issues, possibly
increasing the likelihood of multiple failures. |
