Banks are Risk Factories: An introduction to the Financial Risks from Banking

Banks are key players in the financial economy and have an important function in our society. For example, banks create more than 90% of our money in the form of credit. Further, payments are executed by banks. This can be summarized as: no banks, no credit, money, no payments.
Creating money and payments are essential to our economy and are considered to be 'utility functions'. These bank utility functions are known as commercial banking. But banks also perform other activities, known as investment or merchant banking, such as arranging securities issue of shares and bonds for clients ,giving advice on mergers and acquisitions and trading. For all these activities, banks are exposed to risks. The main financial risks are financial risks: interest risk, market risk, credit risk and liquidity risk.
The profitability of banks highly connects with the exposure to financial risks. To potentially increase profits, bankers take higher financial risks. But of course, these risks can also create losses. To absorb unexpected losses, banks hold a level of buffers: the economic capital. If these buffers are insufficient, the bank can default and cause a financial crisis. The 2008 credit crisis illustrated the potential devastating economic damage of such a financial crisis. Therefore, to avoid such a crisis, banks have to comply to a minimum buffer level, the regulatory capital, that is set by supervisors based on expert publications, for example the well-known Basel Accords published by the Basel Committee on Banking Supervision. In summary: banks are risk factories and the main competence of a banker is to manage financial risk.

After obtaining my masters degree Business Economics (MSc) at Erasmus University Rotterdam in 1988, I have gained expertise in treasury, banking, finance and project management. In 1998 I started my own financial consultancy company: Hecht Consult.
Since 2005 my major activity is to train participants who work for Banks and (Corporate) Treasury Departments. I know from practical experience that finance is not rocket science and you do not need to be a mathematical wizard to understand finance.
My training method targets to strip complex financial topics to the basic structure. The basic structure will support participants to understand and use finance in their future work practice. I have trained hundreds of participants, and many have different backgrounds and finance experience - for example: chartered accountants, controllers, journalists, consultants, IT professionals, and University graduates.