Abstract:-

In the process of taking deposits and disbursing loans, banks are exposed to a number risks. Literature classifies the risks into five main categories: credit risk,, operational risk, market risk, liquidity risk and pillar II risk.These risks in turn affects the performance of the banks. Risk management is a very important part of a bank’s activities.

In the present paper, we analyse whether efficient management of credit risk, market risk, operational risk, liquidity risk and pillar 2 risk contributes in the prevention of bank’s failure through achieving a better performance measured by better profitability. We have also included macroeconomic variables : GDP and inflation as explanatory variables.

Further, we have considered the interconnected nature of profitability and the different categories of risks and have identified both direct effects of each risk category and the indirect effect through other risk categories. Our results suggest that bank risks influence profitability both directly and indirectly, and together they illustrate the transmission channels through which risk dynamics operate within the banking system.

We use dynamic panel methodology for analytical purposes.

(with- Saumita Paul)