Banking Exam Financial Risk Management 2

Question 1

Which risk metric measures the maximum expected loss over a given time horizon at a specified confidence level?

Accepted Answer

Value at Risk (VaR)

Answer

Value at Risk (VaR) quantifies the maximum potential loss over a specific period at a given confidence level, such as 99% over one day.

Question 2

A bank's net interest margin (NIM) is most directly affected by which type of risk?

Accepted Answer

Interest rate risk

Answer

Interest rate risk directly impacts NIM because changes in rates affect the spread between interest earned on assets and interest paid on liabilities.

Question 3

Under Basel III, what is the minimum Common Equity Tier 1 (CET1) capital ratio required for banks?

Accepted Answer

4.5%

Answer

Basel III mandates a minimum CET1 ratio of 4.5% of risk-weighted assets, representing the highest quality capital buffer.

Question 4

What is 'duration gap' used to measure in banking?

Accepted Answer

The sensitivity of a bank's net worth to changes in interest rates

Answer

Duration gap measures the difference between the weighted average duration of assets and liabilities, indicating how sensitive a bank's net worth is to interest rate changes.

Question 5

Which of the following best describes 'concentration risk' in a loan portfolio?

Accepted Answer

Excessive exposure to a single borrower, sector, or geography

Answer

Concentration risk arises when a bank has excessive exposure to a single counterparty, industry, or region, making losses highly correlated.

Banking Exam Practice Test

Banking Exam Practice Test

Banking Exam Financial Risk Management 2