What are the risks of residential finance and how should banks guard against them?

Financial risks can be broadly divided into 8 types of branches, <>

According to the classification of causes, it can be divided into: credit risk, market risk (including exchange rate risk, interest rate risk and investment risk), liquidity risk, operational risk, legal risk and compliance risk, country risk, and reputation risk;

According to the perception of risk by market players, it can be divided into: subjective risk and objective risk; According to whether financial risks can be diversified, they can be divided into: systemic risk and non-systematic risk.

Let's take a closer look.

1. Credit risk.

Credit risk in the narrow sense: the risk of economic loss due to the counterparty's inability to perform the contract, i.e., the risk of default.

Credit risk in a broad sense: due to the impact of various uncertain factors on the credit of financial institutions, the actual income results of financial institutions deviate from the expected goals, and financial institutions may suffer losses or obtain additional income in business activities.

2. Market risk.

Narrow market risk: The loss that a financial institution's trading position in the financial market may suffer due to adverse changes in market** factors.

Broad market risk: The possible gain or loss of a financial institution's trading position in the financial market due to changes in market factors. Broad market risk fully considers that the market may change in its favor and unfavorable direction, which may bring potential gains or losses.

3. Liquidity risk.

In 2015, the China Banking Regulatory Commission (CBRC) issued the Measures for the Management of Liquidity Risk of Commercial Banks (for Trial Implementation), which defines liquidity risk as the risk that a commercial bank is unable to obtain sufficient funds in a timely manner at a reasonable cost to repay due debts, fulfill other payment obligations and meet other capital needs for normal business operations.

Fourth, operational risks.

Operational risk in the narrow sense: the possibility that the operation department of a financial institution may suffer economic losses due to the lack or negligence of internal control, system errors, etc. in the course of operation.

Operational risk in the broad sense: all risks other than credit risk and market risk of financial institutions.

5. Legal risks and compliance risks.

Legal risk: A special operational risk, which refers to the possibility that a financial institution may suffer economic losses as a result of the possibility that the contract or other documents signed between the financial institution and its employees or customers violate the relevant laws or regulations, or the relevant terms are not legally enforceable, or that it fails to properly perform its legal or regulatory duties to the customer.

Compliance risk: The risk that the bank may be subject to legal sanctions or regulatory penalties, significant financial losses or reputational damage due to its failure to comply with laws, regulatory provisions, rules, relevant guidelines for gross inaccuracies formulated by self-regulatory organizations, and codes of conduct applicable to the bank's own business activities.

6. Country risk.

Country risk refers to the risk that an economic entity will suffer losses due to changes in the economic, political and social aspects of other countries when it conducts international economic, trade and financial exchanges with non-domestic counterparties.

7. Reputational risk.

Reputational risk refers to the possibility that financial institutions may suffer corresponding economic losses due to the loss of customers, shareholders, business opportunities, and business costs due to negative evaluation by the public.

The main mechanisms for preventing financial risks are: policy-based institutional mechanisms, enterprise-based management mechanisms, and technical mechanisms.