Research on the Various Forms of Risks in Banking Systems and the Current Regulatory System

Abstract

Since banks occupy a central position in the current global financial system, they play a main role in promoting the development of financial markets and even entire economies. Since banks suffer great losses from the risks caused by borrowers’ potential defaults on the loan when they lend to individuals or institutions, credit risk is normally considered to be the main risk type in the daily operations of banks, while other forms of risk are paid slightly less attention or are completely ignored. The banking industry has undergone many significant changes over the decades, which resulted from the reform of its business model, the emergence of advanced technology, and the improvement of laws and regulations. Therefore, the evolving environment eventually leads to many other forms of risk, which may also result in bank failure and even trigger financial contagion and a global financial crisis. This paper will elaborate on various forms of risk facing banks and corresponding management measures and then discuss whether regulators should exclusively consider credit risk. Although I agree with regulators that credit risk has received more attention in the past, I am sure that each financial crisis contributes to improving their views of the financial system and the complex nature of associated risks. This paper also describes the current regulatory system and provides recommendations on how regulators can efficiently regulate, supervise and support the activities of all financial institutions by creating more robust mechanisms for enforcing regulations.