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Banks operate in a complex financial environment characterized by various types of risks that influence their stability, profitability, and overall performance. These risks arise from both internal and external factors and have implications for different stakeholders, including customers, employees, regulators, and shareholders. Understanding the risk characteristics of banks is essential for implementing robust management control systems that help mitigate these risks and ensure sustainable operations. The primary risk characteristics of banks include credit risk, market risk, operational risk, liquidity risk, interest rate risk, compliance risk, and strategic risk. Each of these risks affects banks differently and requires specific strategies for management and control. Credit risk is one of the most significant risks faced by banks. It arises from the possibility that borrowers or counterparties may fail to meet their obligations in accordance with agreed terms. Non-performing assets (NPAs) are a direct outcome of credit risk, which can severely impact a bank’s financial health. The extent of credit risk depends on the quality of the loan portfolio, underwriting standards, and economic conditions. Poor credit appraisal systems, lax recovery mechanisms, and economic downturns exacerbate this risk. Market risk pertains to potential losses due to fluctuations in market variables such as interest rates, foreign exchange rates, equity prices, and commodity prices. Banks holding large investment portfolios are exposed to market risk, particularly _______ ___ ____ _____ ____ ______.
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