How to Identify risks in Banks:

Risks in Banking business are classified under three heads

(A) Banking Book

(B) Trading Book

(C) Off Balance sheet items

(a) Credit Risk

(a)Market Risk

(a) Credit risk

(b) Operation Risk

(b)Credit Risk

(b) Operational Risk

(c) Interest rate Risk

(c)Operation Risk

(c) Interest rate Risk

(d) Liquidity risk

(d) Liquidity Risk

(e) Market Risk

COIL

MCO

COIL(M)

Use mnemonics technique to remember the risks, like COIL, MMC and COIL(M). Your
understanding of (Risk management depends on your clarity in various types of risks.
You should be careful enough to differentiate between Liquidity risk in Banking book and
Liquidity risk in Off balance sheet items. Similarly with Int rate risk. Crux lies there.
Liquidity Risk is further classified into : Funding Risk, Time Risk and Call Risk(FTC)
Interest rate Risk is further classified into (a) Gap or Mismatch risk (b) Net interest position risk
(c) Basis risk (d) Embedded option risk (e) Yields Curve risk (f) Price Risk (g) Investment risk
( BEG IN PY)
Credit risk is further divided into (a) Default risk (b) Credit Spread/Down Grade Risk (c) Portfolio
Risk- further classified into (1) Systematic risk or intrinsic risk (2) Concentration risk (c)
Counterparty Risk (d) Country Risk.

Market Risk is also known as counterparty risk .

Term risks are used interchangeably.

Banking business lines are grouped under following heads as mentioned above.
A. Banking Book
The Banking Book has Assets and Liabilities. Both are HTM (i.e held until maturity).
So there could be either Maturity Mismatch Risk or Liquidity Risk.
Since both Assets and Liabilities are not interest free there could be changes in Interest
rates during the period which could affect the net interest margin. So there could be
Interest Rate Risk.
Further the Assets side portfolio could suffer defaults in payment of interest
Interest/Principal. So there could be Default Risk which is synonymously called Credit
Risk.

All the above might encompass failures on account of humans or machines etc. So there
could be Operations Risk.
Hence Banking Book has 4 Risks namely Credit , Operations, Interest rate and
Liquidity (COIL).

B. Trading Book

The name itself tells that this book has assets which are tradeable or marketable. So Assets
in Trading Book are not held until maturity. This book follows the principle of Mark-ToMarket

Trading Book is subject to adverse movements in market prices. Hence there could be
Market Risk besides Operational risk and Credit risk. Market risk here is also known
as Market Liquidity Risk.

C. Off Balance Sheet Exposures

May contain any one or all the risks that a Trading Book or a banking Book has. So let us
codify as COIL M.