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Risk Exposure
Risk exposure represents the total amount a financial institution stands to lose from specific risk factors.
Meaning in Practice
It includes on-balance-sheet assets, derivatives positions, and off-balance-sheet commitments. Institutions quantify exposure across credit, market, and operational risks to determine capital needs.
Why It Matters
Understanding exposure levels enables accurate capital allocation and risk mitigation. It prevents excessive concentration in high-risk sectors or counterparties.
Market Impact
High exposure to volatile assets can increase earnings volatility and funding costs. Transparent reporting improves investor confidence and risk pricing.
Example
A bank’s large exposure to commercial real estate loans increases its vulnerability during a property market downturn.
Related Terms
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