Banking Exam Financial Risk Management 3

Question 1

What is the primary purpose of a bank's Asset-Liability Committee (ALCO)?

Accepted Answer

Managing the balance sheet to optimize risk-return and ensure liquidity

Answer

ALCO oversees the bank's balance sheet structure, balancing interest rate risk, liquidity risk, and profitability across assets and liabilities.

Question 2

Which stress testing approach involves regulators prescribing standardized adverse scenarios for banks to model?

Accepted Answer

Supervisory stress testing

Answer

Supervisory stress testing, like the Federal Reserve's DFAST/CCAR, requires banks to use regulator-specified scenarios to assess capital adequacy under stress.

Question 3

A borrower's credit rating is downgraded from investment grade to below investment grade. This triggers which specific risk event?

Accepted Answer

Fallen angel risk

Answer

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.

Question 4

In market risk management, 'basis risk' refers to:

Accepted Answer

The risk that a hedge does not perfectly offset the underlying exposure

Answer

Basis risk occurs when the hedging instrument and the hedged position do not move in perfect correlation, leaving a residual unhedged exposure.

Question 5

What is the Liquidity Coverage Ratio (LCR) designed to ensure?

Accepted Answer

Banks hold sufficient high-quality liquid assets to survive a 30-day stress scenario

Answer

The LCR requires banks to hold enough high-quality liquid assets (HQLA) to cover total net cash outflows over a stressed 30-day period.

Banking Exam Practice Test

Banking Exam Practice Test

Banking Exam Financial Risk Management 3