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Banks must have decisions in advance on the Risk Appetite Framework, including the total risk possibility and type of risks. They must also have strategies and business plans to manage these risks successfully. When generating profits, the following risk factors must be considered: Liquidity Risk, Credit Risk, Operational Risk and Market Risk.)
Liquidity Risk means losses that occur not only when the expected currency flows do not materialize, but also when the currency flows do not reach their targets. All banks must classify and identify market risks, and must record the processes of checking, monitoring, controlling, and identification under written policies, rules, and regulations. Senior executives must then execute these policies after they have been approved by the Board of Directors.
All banks must classify and identify their businesses, including loans, trading funds, finance, foreign exchange and currency trading, investments, and other rights and resources related to significant credit risks of the businesses that are not included in their balance sheets. All policies, rules, and regulations must be documented in writing for the classification and identification of loan types and credit risks. The processes of checking, measuring, monitoring, controlling, identification, and reservation must also be recorded under these written policies, rules, and regulations.
Operational Risk refers to the losses resulting from complex operations, internal control failures, process and information system issues, organizational changes, fraud, human error, terrorist attacks, natural disasters, and unforeseen catastrophes.
Market Risk refers to the potential losses a bank may incur due to fluctuations in market prices, particularly interest rates, foreign exchange rates, share prices, other bond prices, and the prices of unstable commodities. All banks must identify and assess market risks, and the processes of checking, monitoring, controlling, and classifying these risks must be documented in written policies, rules, and regulations. Senior management must then execute these policies after they have been approved by the Board of Directors.
