Requirement: Each discussion question at least 250 words.
Discussion Question 1
Please explain in your own words the what Enterprise Risk Management means to you. Please present your thoughts as if you work for an organization and are part of the organization’s risk department.
Discussion Question 2
Information Asymmetry and Financial Risk.
1. Risk of Information Asymmetry:
Asymmetry means not similar and Information Asymmetry means that there is a knowledge gap between two parties. For example, If there is a buyer and a seller these two are different parties and may have different information about the product. In the case of the Banking Industry, a bank (lender) has limited information about the customer (borrower) but the borrower knows everything about his financial situation. The bank lends on the basis of some criteria like annual income, age, credit history but if the borrower already had a lot of debts or may have more dependents then this causes an asymmetry and there is always some risk to the lender to that borrower. The risk associated with information asymmetry is of two types: Moral Hazard and Adverse Selection. Let’s continue with the lender-borrower example.
Moral Hazard: Moral hazard is the risk that one party (let’s say borrower) has not entered into the contract in good faith or has provided false details about its assets, liabilities, or credit capacity. This lead to moral hazard risk to the lender. On the other hand, sometimes lender intentionally financed the loan to the borrower regardless of his/her credit score, net-worth for the sake of incentive or commission.
Adverse selection: In this type of risk generally seller has more information then the buyer has and the seller intentionally hides the information from the buyer which lead to an adverse selection of a product or vice-versa. For example, if there are a variety of credit cards offered by the bank, then the employee always have more information then the customer and it can lead to the risk that the buyer has some disadvantage of choosing a credit card which has a more annual fee or more interest rate.
2. Financial Risk:
Financial risk is the inability of a company to not being able to pay off the debt it has taken from the bank or the financial institution. Financial risk also refers to the possibility of a government body or corporation defaulting on its bonds, which would cause those bondholders to lose money. Financial risk includes many type of risks like credit risk, market risk, liquidity risk. For example, if a company has more debt than equity than the chances of financial risk is more. Another example, Bank primarily accepts short term deposits and lend money to borrowers as loans. If due to rumors the depositors start large scale withdrawals and bank does not have than much liquidity. Then this situation leads to banks to sell their assets in an unfavorable rate to cover the withdrawals of the depositors.
Please provide an article that references the topics within this discussion post. Please provide why you choose the article and how does it apply to the risks within data collection. Please make sure that you do not have an article that has already been posted.
