Question

why Financial Institutions are particularly susceptible to market Risk.

Answer 1

ANSWER DOWN BELOW. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

Systematic Risk/Non-diversifiable risk/Market risk:

1. Risk related to the economy.

2. Cannot be killed by diversification.

For Example:

1. Suppose a war is declared between two countries.

2. Government decisions / New political party coming into power.

3. Interest rate, Inflation fluctuation risk.

Since, Market risk is the risk related to the economy.

Financial institutions are more exposed to the state of the economy as they actively borrow and invest in all sectors of the economy, they are more exposed to every sector and hence market in general.

They are also most effected a lot by Fiscal policy.

Hence they are particularly susceptible to market Risk.