Loans and money issues

Every year a handful of banks make sufficiently large trading losses to make the non-business sections of the media take note. The surprising thing is not that some banks make large trading losses but how few very large losses are incurred, given the sheer volume of financial trading activities. Very few of the actual losses reported have been sufficiently large to threaten the solvency of the financial institutions concerned.
This state of affairs owes less to the skills of traders and more to the effectiveness and generally high standard of controls put in place to manage market risks. Most of the reported large losses have occurred as a result of fraud at banks where line management has not understood the nature of the risks being taken and failed to implement some of the most basic controls necessary. Single traders have been able to run up losses amounting to several hundred million dollars without anyone noticing. The traders concerned have, of course, taken the rap but the real finger of blame should be pointed in the direction of management.
Trading portfolio risks can be conveniently broken down into three parts: first order price risks, realization risks and model risks. These incorporate our more familiar definitions of interest rate risk, foreign exchange risk, counterparty risk and so on.