Banking Exam Financial Risk Management 5

Question 1

Which of the following is NOT one of the three pillars of the Basel III framework?

Accepted Answer

Mandatory government guarantees

Answer

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.

Question 2

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?

Accepted Answer

NIM decreases because funding costs rise while loan income stays fixed

Answer

When rates rise, variable-rate deposit costs increase immediately while fixed-rate mortgage income remains unchanged, compressing the net interest margin.

Question 3

What distinguishes 'systemic risk' from 'systematic risk' in financial risk management?

Accepted Answer

Systemic risk is the risk of collapse of an entire financial system; systematic risk is non-diversifiable market-wide risk

Answer

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.

Question 4

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?

Accepted Answer

Payer swap

Answer

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.

Question 5

What is the key difference between Expected Loss (EL) and Unexpected Loss (UL) in bank credit risk management?

Accepted Answer

EL is covered by loan pricing and provisions; UL is covered by regulatory capital

Answer

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.

Banking Exam Practice Test

Banking Exam Practice Test

Banking Exam Financial Risk Management 5