Financial Risk Management Flashcards
7 cards from real Banking Exam practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Financial Risk Management flashcards as text
What is the primary purpose of a bank's Asset-Liability Committee (ALCO)?
Answer: Managing the balance sheet to optimize risk-return and ensure liquidity
ALCO oversees the bank's balance sheet structure, balancing interest rate risk, liquidity risk, and profitability across assets and liabilities.
Which stress testing approach involves regulators prescribing standardized adverse scenarios for banks to model?
Answer: Supervisory stress testing
Supervisory stress testing, like the Federal Reserve's DFAST/CCAR, requires banks to use regulator-specified scenarios to assess capital adequacy under stress.
A borrower's credit rating is downgraded from investment grade to below investment grade. This triggers which specific risk event?
Answer: Fallen angel risk
A 'fallen angel' refers to a bond or borrower downgraded from investment grade to speculative grade, triggering forced selling by institutional investors and sharp price declines.
In market risk management, 'basis risk' refers to:
Answer: The risk that a hedge does not perfectly offset the underlying exposure
Basis risk occurs when the hedging instrument and the hedged position do not move in perfect correlation, leaving a residual unhedged exposure.
What is the Liquidity Coverage Ratio (LCR) designed to ensure?
Answer: Banks hold sufficient high-quality liquid assets to survive a 30-day stress scenario
The LCR requires banks to hold enough high-quality liquid assets (HQLA) to cover total net cash outflows over a stressed 30-day period.
Which of the following is an example of operational risk in banking?
Answer: A rogue trader executing unauthorized transactions
Operational risk includes losses from failed internal processes, systems, human error, or external events — unauthorized trading is a classic example.
What is 'repricing risk' in the context of interest rate risk management?
Answer: The risk arising from differences in the timing of rate changes on assets versus liabilities
Repricing risk occurs when assets and liabilities mature or reprice at different times, exposing a bank to changes in net interest income when rates shift.