Risk and basic risk management framework

Risk is the possibility of loss or adverse outcome arising from uncertainty in future events. In banking, it refers to the potential for financial loss, reputational damage, or regulatory penalty due to unexpected changes in market, credit, or operational conditions.

Risk with only loss outcomes, no gain possibility.

The three primary categories are credit risk (risk of borrower default), market risk (risk from changes in market prices), and operational risk (risk from failed processes, people, or systems). These form the core risk taxonomy under Basel norms.

Risk that can result in either gain or loss.

Credit risk is the risk of loss arising from a borrower's failure to repay a loan or meet contractual obligations. It is the most significant risk for most banks and is managed through credit appraisal, limits, and provisioning norms.

Risk of loss due to borrower's country economic or political issues.

Market risk is the risk of losses in on- and off-balance-sheet positions arising from movements in market prices, including interest rates, equity prices, foreign exchange rates, and commodity prices. Banks are required to hold capital against market risk.

Risk that counterparty fails to deliver on settlement date.