Financial risk refers to the possibility of losses within the financial system.

It arises from:

• Market fluctuations

• Credit defaults

• Liquidity shortages

• Operational failures

Managing financial risk is essential to protect banks, investors, and the broader economy.

Credit risk is the risk that a borrower fails to repay a loan or meet contractual obligations.

For banks, credit risk mainly comes from:

• Corporate loans

• Mortgages

• Consumer lending

Higher credit risk can lead to losses, reduced capital, and weaker financial stability.

Systemic risk is the risk that problems in one institution or market spread to the entire financial system.

It can result from:

• Highly interconnected banks

• Excessive leverage

• Loss of confidence

Systemic risk is why financial crises can affect economies far beyond the original source of the problem.

Basel III is an international regulatory framework designed to strengthen the global banking system.

Its goals include:

• Increasing bank capital

• Improving liquidity standards

• Reducing excessive risk-taking

Basel III was introduced after the global financial crisis to make banks more resilient.

Common Equity Tier 1 (CET1) capital is the highest-quality form of bank capital.

It mainly consists of:

• Common shares

• Retained earnings

CET1 capital acts as the first line of defense against losses and is closely monitored by regulators.

Capital buffers are extra layers of capital banks must hold above minimum requirements.

They:

• Absorb losses during stress periods

• Protect depositors

• Reduce the risk of bank failures

• Support financial stability

Capital buffers help ensure that banks remain operational even during economic downturns.