Banking risk is basically the probability of the occurrence of an unexpected contingency that has the possibility of creating an uncontrolled cashflow. It is important to understand the fact that there exist a clear difference between banking risks and banking uncertainties. While risks are directly attributed to the a business cycle or general company failures, uncertainties are factors that are beyond the control of the banking institutions and may include global financial crises, political instability and calamities. Risks are there therefore directly a management issue that a bank should have in place strong measures to curb their possible occurrence (Lecture 4).
The main types of risks that banks face in their everyday operation are quite diverse and may include but not limited credit risks normally involving debtors who fail to meet their contractual obligations, market risks that are associated with price fluctuations, liquidity risks in the event that the assets fail to recover their costs when put up for sale, and interest rate risks that results from sudden changes in exchange rates. Other forms of banking risks include possibilities of banking frauds, operational risks and the possible loss of reputation (Lecture 4).
The banking sector in Germany faces credit related risks that has been the biggest concern not only amongst the industry players but also within the political and labor circles. This very high credit risk has seen high rates of contraction of the gross domestic product with subsequent results of massive layoffs. European banks are equally exposed credit risks especially in the Eastern Europe and Spain. This situation has forced major European banks to write off bad debts totaling to nearly 100 billion pounds. Though the risk factor is not so sudden with the European banks, it is nonetheless clear that real banking risks do exist and may actually result in very huge financial losses (Evans-Pritchard 2010).
Review of relevant literature and theory
It is generally agreed that banking risks are real both in Germany and in Europe. While several risks may be facing the banking sector of the two study countries some which may be similar while others are country specific, it is clear from this analysis that credit risk remain the single biggest challenge to banks both in Germany as well as in Europe. The case with most European banks may not be so pronounced as compared to the cases of Germany. This is attributed to the very high rates at which the banks write off the bad debts. The main risks that are associated with the European banks are related to credit risks with the banks in which the government has stakes mostly affected (Harrison 2009).
The risk situation in Germanys banking sector continues to face more intense credit risks specifically compounded by the poor global economy and unstable financial markets. According to the Central Bank reports, German banks risk facing bigger debt write-offs unless they significantly increase their capital. According to the Deutsche Bundesbank, most of the Germans banks will most probably face billions of losses on security products unless the global economy and the financial markets make a significant recovery.
This situation has compelled the government to come up with rescue strategies aimed at reviving the nearly collapsing banking sector that would see investors loose billions of money. However, the governments possible rescue is dependent on the approval of the European Union regulators. The regulators are however not in full support of the excessive state aid to the banking sector. The Commission holds to the view that banks should instead focus on strengthening their capital bases by giving fresh guarantees to the existing shareholders (Smith 2009).
The main solution to the German banking risks is seen to lie in possible future write-offs until such a time that there would be substantial recovery in the global financial markets and the entire world economy. The banking sector and especially the smaller banks remain significantly vulnerable to interest rate risks especially the upward turn in interest rates. The responsibility of reducing the major banking risks in Germany is seen to lie in the ability of the European Central Banks to develop strategies for exiting stimulus policies. The long-term consequences of the banking risk crisis according to Bundesbank may result into prolonged periods of low interest rates that is likely to impact on other strategic sectors like the insurance industry whose ability to meet future obligations may be greatly threatened (Smith 2009).
T
hough the banking risks in Germany have for a long time remained a big concern, experts are for the opinion that the problem has mostly been compounded by lack of transparence and failure to disclose financial details. However the risks seem to be less harmful than they are actually feared with the signs of stability both in credit and liquidity. The possibility of the market turbulence and a stronger euro to spring up economic growth will significantly reduce the risks of the banks in Germany (Landler 2007).
The most prudent solution to the risks that are associated with German banks will however lie with the ability of the European Central Bank to stabilize the interest rates, and for the affected banks to write off their leveraged loan portfolio on the value of assets as well as the mortgage backed securities (Landler 2007).
The credit risk has equally been a toxic issue for the European banks as well. Indeed the global banks have been compelled to write-off nearly half of their bad debts especially in the Eastern Europe which remain to be seen as a subprime debacle. The corporate debts in Europe have significantly risen to nearly 94 per cent of the Gross Domestic Product, and the default cases continue to be on the increase (Evans-Pritchard and Bruno 2009).
The European case may even be made more complex in the event that countries start competing with each other on the rescue programs for their banks and end up diverting state aid. This would have the effect of a bloated budget deficit which at present is almost hitting a 13 percent figure of the Gross Domestic Product. While government support to ailing banks is important, it should not be carried out on a scale that raises concerns about financing problems (Evans-Pritchard and Bruno 2009).
While Europe in general might seem much safer from bank related risks, western backs that have for a long time done well in Eastern Europe are currently facing a difficult time given the fact that the major European economies are currently in recession and most of their large banks have cut down on lending both at home and abroad. As a result, the Western banks are faced with the possibility o increasing nonperforming loans and will need to seek recapitalization. This problem has further been compounded by the fact that the institutional investors in the Western Europe mainly banks and insurance companies have big shares in the East European Debts. This means that the Eastern banks cannot get capital infusion from the Western governments that are already straining to pay stimulus packages for their own social safety nets (Schwartz 2009).
The risks that are associated with the banking sector remain real both in Germany and in Europe. Though the magnitude of risk may vary from one country to country and from bank to bank, the common feature according to this analysis remains the credit risk that cuts across the entire banking sector world wide. This has made policy makers to recommend that a close specific bank diagnosis. It is however clear that failure to address this problem may only compound the crisis. While aiding of the ailing banks has for long been the most preferred approach, it is important that the market place and its dynamics play a leading role in differentiating the banks and allow those that are sound enough to continue their operations without key changes while the unsustainable banks are significantly restructured (Posen and Veron 2009).
Methodology and Data
In a study the methodology section is one of the crucial areas to be tackled. This is due to the fact that it forms the basis of the results of study findings. A study can be faced with big challenges due to a wrong choice of the method to be used. To avoid this good planning of the method is essential and more in order to get reliable results. The four categories of quality management in a study were highly considered. These include validity, reliability, ethics and rigor. Reliability of a study is its ability to have consistence in results. This is done on controlling the sample by stratifying the population to get a more representative sample. Validity is the ability of a scale to measure what it is intended to measure but not going beyond the topic of the study.
The subjects of analysis in this study include details on banking risks of major banks in Germany as compared to the risks faced by key banks in Europe. This study has utilized quantitative research method. The data was collected from different banks and banking consultants both in Germany and in Europe. This was edited so that relativity in banking risks could be analyzed by working out mean, medium and mode, percentages and other measures of central tendencies have also been worked out.
This study has been conducted through quantitative data analysis. The data was collected from different banks both in Germany and in Europe. The data obtained was edited for errors and to separate useful information from less useful ones. The data was then coded for easy analysis. The data was analyzed by working out relevant measures of central tendencies before finally drawing conclusions.
Results and Discussions
From the analysis of the banking risks of the sector both is Germany and in Europe, it is evident that the banking sector has for a very long time been bound by numerous risks. These have however not been brought to the forefront given the nondisclosure policy that most banks tend to pursue. This analysis has however been able to indentify several risks including market risks, interest rate risks, credit risks, market policy risks, e-banking risks among others. Aspects that are associated with uncertainties including political instabilities and calamities have however not been classified as risks since that are not management related issues.
The dominant risk that cuts across the board and that has posed true risk to the banks for a long time is the credit crisis. This has been more pronounced in the Eastern Europe and Germany where there has continually been a trend to lend out especially to institutional borrowers. The trend in global economic recession has compounded the problem of debt crisis in the two countries. The other crisis that closely followed debt crisis is the interest rate crisis. This is because continuous fluctuations in the world market economy and the global economic crisis has made this crisis to keep on confronting the banking sector in these two countries.
The other risks that the banking sector faces both in Germany and in Europe relates to banking fraud which is slow but significantly gaining predominance, operational risks, the possible loss of reputation, liquidity risk, and systematic risks normally as a result failure in the banking system. While certainly banks are worse hit by the banking crises in Germany, other have been able to manage the associated risks and continues to do very well in this sector. At the same time, some banks have also been adversely affected by the banking crisis in Europe. This similarity in scenario clearly indicates the existence of banking risks in the two countries. It is therefore only prudent to categorically argue that all banks face banking risks whether in Germany or in Europe.
Conclusions and recommendations The results of this analysis indicate that risks associated with the banking sector are bank specific and country specific. This means that any individual bank may be confronted by its own nature of a crisis that cannot necessarily be categorized as a general problem within the country. At the same time, each country is faced by its own economic conditions that are likely to trigger a unique kind of crisis within its banking sector. It is therefore not prudent to say that German banks are riskier than European banks.
While banking crises continues to be a concern to most governments especially when it touches on state owned institutions, the trend in the past has always been on the banks to bail out the ailing institution leading to very heavy constrains on their national budgets by creating huge budget deficits. It is even more pronounced where risks that are associated with debts weigh very heavily on the Gross Domestic Product of a country. Clear regulatory policies should therefore be pursued by countries to ensure that the levels of banking risks are significantly reduced.
Since banking risks are management related concerns, it is important that individual banks pursues policies that would ensure prudent management of their financial resources as well as avoid overinvestment in loan portfolios that have subjected many banks to credit crisis. Instead banks should strive to pursue policies that would ensure they retain the confidence of the existing shareholders and to ensure stability of their capital base at all time. Where banks consistently display poor performance that subjects investors to heavy banking risks, the governments should step in with regulatory measure to protect the investor from possible investment losses.
The main types of risks that banks face in their everyday operation are quite diverse and may include but not limited credit risks normally involving debtors who fail to meet their contractual obligations, market risks that are associated with price fluctuations, liquidity risks in the event that the assets fail to recover their costs when put up for sale, and interest rate risks that results from sudden changes in exchange rates. Other forms of banking risks include possibilities of banking frauds, operational risks and the possible loss of reputation (Lecture 4).
The banking sector in Germany faces credit related risks that has been the biggest concern not only amongst the industry players but also within the political and labor circles. This very high credit risk has seen high rates of contraction of the gross domestic product with subsequent results of massive layoffs. European banks are equally exposed credit risks especially in the Eastern Europe and Spain. This situation has forced major European banks to write off bad debts totaling to nearly 100 billion pounds. Though the risk factor is not so sudden with the European banks, it is nonetheless clear that real banking risks do exist and may actually result in very huge financial losses (Evans-Pritchard 2010).
Review of relevant literature and theory
It is generally agreed that banking risks are real both in Germany and in Europe. While several risks may be facing the banking sector of the two study countries some which may be similar while others are country specific, it is clear from this analysis that credit risk remain the single biggest challenge to banks both in Germany as well as in Europe. The case with most European banks may not be so pronounced as compared to the cases of Germany. This is attributed to the very high rates at which the banks write off the bad debts. The main risks that are associated with the European banks are related to credit risks with the banks in which the government has stakes mostly affected (Harrison 2009).
The risk situation in Germanys banking sector continues to face more intense credit risks specifically compounded by the poor global economy and unstable financial markets. According to the Central Bank reports, German banks risk facing bigger debt write-offs unless they significantly increase their capital. According to the Deutsche Bundesbank, most of the Germans banks will most probably face billions of losses on security products unless the global economy and the financial markets make a significant recovery.
This situation has compelled the government to come up with rescue strategies aimed at reviving the nearly collapsing banking sector that would see investors loose billions of money. However, the governments possible rescue is dependent on the approval of the European Union regulators. The regulators are however not in full support of the excessive state aid to the banking sector. The Commission holds to the view that banks should instead focus on strengthening their capital bases by giving fresh guarantees to the existing shareholders (Smith 2009).
The main solution to the German banking risks is seen to lie in possible future write-offs until such a time that there would be substantial recovery in the global financial markets and the entire world economy. The banking sector and especially the smaller banks remain significantly vulnerable to interest rate risks especially the upward turn in interest rates. The responsibility of reducing the major banking risks in Germany is seen to lie in the ability of the European Central Banks to develop strategies for exiting stimulus policies. The long-term consequences of the banking risk crisis according to Bundesbank may result into prolonged periods of low interest rates that is likely to impact on other strategic sectors like the insurance industry whose ability to meet future obligations may be greatly threatened (Smith 2009).
T
hough the banking risks in Germany have for a long time remained a big concern, experts are for the opinion that the problem has mostly been compounded by lack of transparence and failure to disclose financial details. However the risks seem to be less harmful than they are actually feared with the signs of stability both in credit and liquidity. The possibility of the market turbulence and a stronger euro to spring up economic growth will significantly reduce the risks of the banks in Germany (Landler 2007).
The most prudent solution to the risks that are associated with German banks will however lie with the ability of the European Central Bank to stabilize the interest rates, and for the affected banks to write off their leveraged loan portfolio on the value of assets as well as the mortgage backed securities (Landler 2007).
The credit risk has equally been a toxic issue for the European banks as well. Indeed the global banks have been compelled to write-off nearly half of their bad debts especially in the Eastern Europe which remain to be seen as a subprime debacle. The corporate debts in Europe have significantly risen to nearly 94 per cent of the Gross Domestic Product, and the default cases continue to be on the increase (Evans-Pritchard and Bruno 2009).
The European case may even be made more complex in the event that countries start competing with each other on the rescue programs for their banks and end up diverting state aid. This would have the effect of a bloated budget deficit which at present is almost hitting a 13 percent figure of the Gross Domestic Product. While government support to ailing banks is important, it should not be carried out on a scale that raises concerns about financing problems (Evans-Pritchard and Bruno 2009).
While Europe in general might seem much safer from bank related risks, western backs that have for a long time done well in Eastern Europe are currently facing a difficult time given the fact that the major European economies are currently in recession and most of their large banks have cut down on lending both at home and abroad. As a result, the Western banks are faced with the possibility o increasing nonperforming loans and will need to seek recapitalization. This problem has further been compounded by the fact that the institutional investors in the Western Europe mainly banks and insurance companies have big shares in the East European Debts. This means that the Eastern banks cannot get capital infusion from the Western governments that are already straining to pay stimulus packages for their own social safety nets (Schwartz 2009).
The risks that are associated with the banking sector remain real both in Germany and in Europe. Though the magnitude of risk may vary from one country to country and from bank to bank, the common feature according to this analysis remains the credit risk that cuts across the entire banking sector world wide. This has made policy makers to recommend that a close specific bank diagnosis. It is however clear that failure to address this problem may only compound the crisis. While aiding of the ailing banks has for long been the most preferred approach, it is important that the market place and its dynamics play a leading role in differentiating the banks and allow those that are sound enough to continue their operations without key changes while the unsustainable banks are significantly restructured (Posen and Veron 2009).
Methodology and Data
In a study the methodology section is one of the crucial areas to be tackled. This is due to the fact that it forms the basis of the results of study findings. A study can be faced with big challenges due to a wrong choice of the method to be used. To avoid this good planning of the method is essential and more in order to get reliable results. The four categories of quality management in a study were highly considered. These include validity, reliability, ethics and rigor. Reliability of a study is its ability to have consistence in results. This is done on controlling the sample by stratifying the population to get a more representative sample. Validity is the ability of a scale to measure what it is intended to measure but not going beyond the topic of the study.
The subjects of analysis in this study include details on banking risks of major banks in Germany as compared to the risks faced by key banks in Europe. This study has utilized quantitative research method. The data was collected from different banks and banking consultants both in Germany and in Europe. This was edited so that relativity in banking risks could be analyzed by working out mean, medium and mode, percentages and other measures of central tendencies have also been worked out.
This study has been conducted through quantitative data analysis. The data was collected from different banks both in Germany and in Europe. The data obtained was edited for errors and to separate useful information from less useful ones. The data was then coded for easy analysis. The data was analyzed by working out relevant measures of central tendencies before finally drawing conclusions.
Results and Discussions
From the analysis of the banking risks of the sector both is Germany and in Europe, it is evident that the banking sector has for a very long time been bound by numerous risks. These have however not been brought to the forefront given the nondisclosure policy that most banks tend to pursue. This analysis has however been able to indentify several risks including market risks, interest rate risks, credit risks, market policy risks, e-banking risks among others. Aspects that are associated with uncertainties including political instabilities and calamities have however not been classified as risks since that are not management related issues.
The dominant risk that cuts across the board and that has posed true risk to the banks for a long time is the credit crisis. This has been more pronounced in the Eastern Europe and Germany where there has continually been a trend to lend out especially to institutional borrowers. The trend in global economic recession has compounded the problem of debt crisis in the two countries. The other crisis that closely followed debt crisis is the interest rate crisis. This is because continuous fluctuations in the world market economy and the global economic crisis has made this crisis to keep on confronting the banking sector in these two countries.
The other risks that the banking sector faces both in Germany and in Europe relates to banking fraud which is slow but significantly gaining predominance, operational risks, the possible loss of reputation, liquidity risk, and systematic risks normally as a result failure in the banking system. While certainly banks are worse hit by the banking crises in Germany, other have been able to manage the associated risks and continues to do very well in this sector. At the same time, some banks have also been adversely affected by the banking crisis in Europe. This similarity in scenario clearly indicates the existence of banking risks in the two countries. It is therefore only prudent to categorically argue that all banks face banking risks whether in Germany or in Europe.
Conclusions and recommendations The results of this analysis indicate that risks associated with the banking sector are bank specific and country specific. This means that any individual bank may be confronted by its own nature of a crisis that cannot necessarily be categorized as a general problem within the country. At the same time, each country is faced by its own economic conditions that are likely to trigger a unique kind of crisis within its banking sector. It is therefore not prudent to say that German banks are riskier than European banks.
While banking crises continues to be a concern to most governments especially when it touches on state owned institutions, the trend in the past has always been on the banks to bail out the ailing institution leading to very heavy constrains on their national budgets by creating huge budget deficits. It is even more pronounced where risks that are associated with debts weigh very heavily on the Gross Domestic Product of a country. Clear regulatory policies should therefore be pursued by countries to ensure that the levels of banking risks are significantly reduced.
Since banking risks are management related concerns, it is important that individual banks pursues policies that would ensure prudent management of their financial resources as well as avoid overinvestment in loan portfolios that have subjected many banks to credit crisis. Instead banks should strive to pursue policies that would ensure they retain the confidence of the existing shareholders and to ensure stability of their capital base at all time. Where banks consistently display poor performance that subjects investors to heavy banking risks, the governments should step in with regulatory measure to protect the investor from possible investment losses.
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