From the course: Introduction to Risk Management
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What is risk?
From the course: Introduction to Risk Management
What is risk?
- We're going to explore all the different types of risks that banks and financial institutions are exposed to. But I want to just dig a little bit deeper into our definition of risk. Risk is more than just the chance that a bank might lose money, although often that is the end result. Risk is uncertainty on future expected outcomes. In other words, if something is certain to happen, there is no risk. If a bank knows that it's going to lose $100 on a specific transaction, there is no risk associated with that transaction, even though the outcome is clearly negative. Let's look at an example. Banks lend money to customers in the shape of loans. The bank doesn't know with 100% certainty that they will be repaid in full. There is no guarantee that the borrower, despite their income, despite their job security, will be able to pay all the interest and the principal back when the loan is due, when the bank first makes that loan. In other words, the bank is exposed to risk. In this example,…
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