ECONOMICS (CBSE/UGC NET)

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ECONOMICS

FINANCIAL MARKETS

Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
Excessive risk-taking by financial institutions-e.g. many financial institutions, especially investment banks, made very risky investments in the hope of making large profits.
A
Yes, I understand this from the notes
B
No, I don’t understand this from the notes
C
No, I don’t understand this, as I have not read the notes
D
None of the above
Explanation: 

Detailed explanation-1: -Credit risk is the biggest risk for banks. It occurs when borrowers or counterparties fail to meet contractual obligations. An example is when borrowers default on a principal or interest payment of a loan.

Detailed explanation-2: -Credit risk is the most recognizable risk associated with banking. This definition, however, encompasses more than the traditional definition associated with lending activities.

Detailed explanation-3: -Based on this, financial risk can be classified into various types such as Market Risk, Credit Risk, Liquidity Risk, Operational Risk, and Legal Risk.

Detailed explanation-4: -Systemic risk refers to the risk of a breakdown of an entire system rather than simply the failure of individual parts. In a financial context, it denotes the risk of a cascading failure in the financial sector, caused by linkages within the financial system, resulting in a severe economic downturn.

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