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International Trade and Banking
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| Words: 1803 | Submitted: 26-Mar-2011
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DescriptionInternational Trade and Banking
In general, there are two types of financial institutions, one is bank, and the other type is non-bank financial institution (Hogan et al., 2004). Bank is the main type of financial institution in financial system in the world (Viney, 2009). Banks incur some different types of risk in operating. Banking risk is possibility of bank’s property and expectation income losing due to various uncertainties in bank operating (He, 2008). The primary cause of banks undertaking the risks is that risks accompanied with the proceeds in bank operating. Therefore, banking risks can be defined as a kind of future earnings or losses of uncertain (He, 2008). Banking risks mainly include nine major types: credit risk, market risk, operational risk, liquidity risk, country risk, reputational risk, legal risk and compliance risk and strategic risk.
The credit risk is defined as “the risk that the interest or principal, or both, on securities and loans will not be paid as promised” (Hogan et al., 2004). The loss here is comprehended for only being to break contract actual occurrence would produce. Therefore, the credit risk is again called default risk. Credit risk has some characteristics. This is mainly reflected in the non-systematic, non-normal distribution, information asymmetry seriously and lack of data. Firstly, credit risk is obvious non-systemic. Despite the borrower's repayment ability will also be impacted by systemic factors such as economic crisis. However, in most cases depends primarily on the non-systemic factors, which clearly associated with the borrower, such as the loan to invest in, and operation and management of the borrower’s capacity, financial status, repayment will. Therefore, the dispersion is an important method of credit risk management, especially in the circumstances that credit risk management lacks of market risk management means, such as hedging, the dispersion to become the primary means of credit risk management. Secondly, the probability distribution of credit risk is non-normal distribution. Loss and gain of credit risk is asymmetric, and this asymmetry manifested in two aspects: one is the significant differences between amount of loss and gain significant differences, on the other hand is a huge difference in the probability of occurrence. Thirdly, information asymmetry serious has an important function in the formation of credit risk. Credit Trading, such as lending, both parties in bargain are not on an equal footing ...
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