Example 1: Risk Scenario for a Stock Portfolio
Financial Situation: Equity Investment Portfolio
Language: English
Potential Risk Scenario: Market Downturn Impacting Equity Portfolio
A sudden economic downturn leads to widespread market sell-offs, causing significant declines in the value of stocks within the portfolio. This is exacerbated by sector-specific risks, such as underperformance in technology and financial stocks, which make up a large portion of the portfolio. The lack of diversification amplifies the losses, while insufficient use of hedging instruments leaves the portfolio exposed to prolonged volatility.
Example 2: Risk Scenario for a Loan Portfolio
Financial Situation: Corporate Loan Portfolio
Language: English
Potential Risk Scenario: Increased Defaults in the Loan Portfolio
An economic recession results in reduced cash flows for corporate borrowers, particularly those in cyclical industries like construction and retail. As borrowers face financial stress, loan defaults increase, leading to significant write-offs. Concentration risk further worsens the impact, as a few large borrowers contribute disproportionately to the total exposure. The bank’s provisioning proves insufficient, resulting in reduced profitability and increased regulatory scrutiny.
