ASSIGNMENT

Assignment

Traditional Banking and Risks

Introduction

Successful companies requires huge amount of fund for their operations and this huge fund can only be supplied by banks on short duration. This clearly shows that the importance of banks in current and previous era. As there are two phases of banking systems, in this report, the discussion would be on traditional bank that used to only accept the deposit from the customer and created the asset from these deposits, while in modern era, banks has been providing the large amount of different activities for their customer.

Traditional Banking

The role of traditional bank is simple as compare to the modern banking system. Moreover, bank is known as the first financial intermediaries that played three to four common functions (Wagner, 2012, pp. 187-210). The role and functions of the traditional bank includes:

The traditional bank played the role of depository institution which means that the bank maintain and check the deposit money.

The traditional bank issued the loan to the customer on the basis of the small terms and conditions.

This shows that the traditional bank whether played the role of depositing intermediaries or issued the loan to the customers.

Recession

Recession is known as the economic cycle, in which economic activity of the country slowdown than the past. This shows that if the economic activity of the country decreases, then it brings the recession and inflation in the country. The recession activity in the country starts when the unemployment rate is high. The high unemployment rate decreases the standard of the common people which in turn decreases the demand of the product. If the demand of the product increase then the inflation rate increases. The high inflation rate decreases the growth of the economy. Moreover, in this phase, the GDP rate of the country decrease that brings the real output level to the trough situation. Below is the chart that is taken from the business economy websites. According to this chart, recession is the period when the level of output decrees from peak period to the trough period. But after the high recession rate, the economy of the country recovers itself and again goes to the peak period (Wheelock, 2011, pp. 93).

Source: Business Economy

Exposure to Risks

The traditional bank played the two roles that included to deposit and issue the money. However, as the operations of the traditional bank increased, it also increased the negative effect on the outcome of the bank. Moreover, the negative impact created the high amount of risk in the operations of the bank (Gertler et. al, 2012, pp. 17-34). The different types of risks faced by the banks are credit risk, market risk, liquidity risk, legal risk, reputational risk, etc.

Types of Risk

There was large amount of risks that was faced by the traditional bank but this study covers the 4 types of risks only.

1. Liquidity Risk

Liquidity risk is the type of risk that put the negative effect on the financial statement of the organization. The liquidity risk of the bank showed that banks were not able to meet ...