1. LIQUIDITY RISK
1.1. The risk that a financial institution will be unable to generate sufficient cash inflow to meet required cash outflows
1.1.1. Banks and thrifts need liquidity to meet deposit withdrawals and pay off other liabilities as they come due
1.1.2. Pension funds need liquidity to meet contractual pension payments
1.1.3. Life insurance companies need liquidity to pay death benefits
2. FOREIGN EXCHANGE RISK
2.1. The fluctuation in the earnings or value of a financial institution that arises from fluctuations in exchange rates
2.1.1. Many financial institutions deal in foreign currencies for their own account, or they buy or sell currencies for their customers
2.1.2. Financial institutions invest in the direct credit markets of other countries, or they may sell indirect financial claims overseas
3. POLITICAL RISK
3.1. The fluctuation in value of a financial institution resulting from the actions of the U.S. or foreign governments
3.1.1. Domestic
3.1.1.1. If the government changes the regulations faced by financial institutions, their earnings or values are affected
3.1.1.2. Managers must be prepared to react quickly when regulatory changes occur.
3.1.2. International
3.1.2.1. When institutions consider lending in developing countries without stable governments or well-developed legal systems. Governments can repudiate foreign debt obligations
3.1.2.2. Managers of financial institutions must understand how to measure and manage these risks
4. CREDIT RISK
4.1. The borrower will fail to make either interest or principal payments in the amount and at the time promised
4.1.1. Diversify their portfolios
4.1.2. Conduct a careful credit analysis of the borrower to measure default risk exposure
4.1.3. Monitor the borrower over the life of the loan or investment to detect any critical changes in financial health
5. INTEREST RATE RISK
5.1. The risk of fluctuations in a security’s price or reinvestment income caused by changes in market interest rates
5.1.1. Assets
5.1.1.1. The yields they earned on their mortgage loans
5.1.2. Liabilities
5.1.2.1. The interest rates they paid on deposits