As financial risks are risks of a business entity called that originated in the financial sector and have a direct impact on the income statement impact. Financial risks are particularly assumed by credit institutions because financial transactions represent a core business of banking .
Economic subjects include households , companies and the state . Financial risks can arise in all of them, which can endanger their financial stability. Private households can recognize and eliminate possible financial risks through private financial planning within the framework of the existing general financial education . In the company, the financial risks belong to the special entrepreneurial risks , because they arise directly from the operational production process, but can also result from non-operational risks. Financial risks there form part of the economic risks that can arise from entrepreneurial activity. Their precise classification as a type of risk can be found in the article on the risk report . As with all operational risks, financial risk can be countered by means of suitable risk management .
For rating agencies, there are two spheres of risk in companies, namely business and financial risk. The latter is made up of financial policy , profitability , capital structure , cash flow generation and financial flexibility.
These are financial risks
- Market price risk: The risk of financial losses due to changes in market prices such as interest rates or exchange rates . The market risk refers to the exchange rate risks of price fluctuations on the procurement and sales markets, including those of non-banks .
- Counterparty default risk (credit risk): The risk of financial losses due to the default ( bankruptcy ) of a borrower or debtor .
Liquidity risk :
- The risk of being able to conclude transactions only under unfavorable conditions or not at all due to insufficient market liquidity and thus suffering losses ( market liquidity risk ).
- The risk of not being able to procure the required means of payment or only being able to procure them at a higher price ( liquidity risk in the narrow sense or refinancing risk)
- In the case of credit institutions, there is also the counterparty default risk , which consists of the risk of the counterparty of a transaction failing before the final settlement of the payments associated with this transaction (Art. 2 No. 11 Regulation on OTC derivatives, central counterparties and trade repositories).
These types of financial risk can also be broken down into direct and indirect financial risks . The market risk, the risks from derivatives , securities and foreign exchange belong to the direct financial risks . Indirect financial risks include default, liquidity and credit risk .
Risk of success
Market price risk, counterparty default risk and liquidity risk are among the risks to success or earnings, as they have a negative effect on the profit of a company or even increase the loss if they occur. The refinancing risk may affect as income risk if the costs for the procurement of liquidity for a company rise. Mostly, however, withdrawals are made at the risk of insolvency , and the refinancing risk is then not counted among the earnings risks.
- Simon Schiffel, Implicit Probabilities of Default of Corporate Bonds , 2009, p. 49 f.
- Regulation (EU) No. 648/2012 of July 4, 2012, ABl. L 201/1
- Thorsten Schmitz / Michael Wehrheim, Risk Management: Basics - Theory - Practice , 2006, p. 40 f.