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
Which of the following is NOT one of the three pillars of the Basel III framework?
Answer: Mandatory government guarantees
The three pillars of Basel III are minimum capital requirements (Pillar 1), supervisory review (Pillar 2), and market discipline through disclosure (Pillar 3); government guarantees are not a pillar.
A bank has a high proportion of fixed-rate long-term mortgages funded by short-term variable-rate deposits. When interest rates rise, what happens to the bank's net interest margin?
Answer: NIM decreases because funding costs rise while loan income stays fixed
When rates rise, variable-rate deposit costs increase immediately while fixed-rate mortgage income remains unchanged, compressing the net interest margin.
What distinguishes 'systemic risk' from 'systematic risk' in financial risk management?
Answer: Systemic risk is the risk of collapse of an entire financial system; systematic risk is non-diversifiable market-wide risk
Systemic risk refers to the risk of a cascading collapse of the entire financial system (e.g., 2008 crisis), while systematic risk is non-diversifiable risk driven by macroeconomic factors affecting all assets.
A bank uses an interest rate swap to convert fixed-rate loan income to floating-rate. If the bank is paying fixed and receiving floating, what is the bank's position called?
Answer: Payer swap
A payer swap means the bank pays fixed and receives floating, effectively converting fixed-rate asset income into floating-rate income to hedge liability repricing risk.
What is the key difference between Expected Loss (EL) and Unexpected Loss (UL) in bank credit risk management?
Answer: EL is covered by loan pricing and provisions; UL is covered by regulatory capital
Banks price EL into loan spreads and set loan loss provisions for it, while economic and regulatory capital is held to absorb unexpected losses beyond the expected level.
Which regulatory requirement mandates that U.S. banks with over $100 billion in assets undergo annual company-run and supervisory stress tests?
Answer: Dodd-Frank Act Stress Testing (DFAST)
DFAST requires large U.S. banks to conduct annual stress tests using regulatory-specified scenarios to demonstrate capital adequacy under stress.
In the context of market risk, what does 'convexity' measure for a bond portfolio?
Answer: The sensitivity of bond duration to changes in interest rates
Convexity measures the rate of change of duration as interest rates change, capturing the curvature of the price-yield relationship that duration alone misses.