Risk Management Flashcards
7 cards from real Banking practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Risk Management flashcards as text
What is the primary purpose of a bank's stress testing program?
Answer: To evaluate capital adequacy under adverse economic scenarios
Stress testing assesses whether a bank maintains sufficient capital to absorb losses during hypothetical adverse economic conditions.
Which of the following best describes 'operational risk' in a banking context?
Answer: Risk of loss from inadequate processes, people, systems, or external events
Operational risk covers losses stemming from internal failures—people, processes, systems—or external events like fraud or natural disasters.
Under the Net Stable Funding Ratio (NSFR), which of the following is the correct relationship that must be maintained?
Answer: Available Stable Funding ≥ Required Stable Funding
The NSFR requires that Available Stable Funding (ASF) must equal or exceed Required Stable Funding (RSF) to ensure long-term liquidity resilience.
A bank's risk appetite statement is best described as:
Answer: The amount and type of risk the bank is willing to accept to achieve its objectives
A risk appetite statement defines the level and types of risk the board and management are willing to accept in pursuit of strategic goals.
Which of the following scenarios represents 'basis risk' in banking?
Answer: A bank's LIBOR-based loans are funded by Prime-rate deposits, and the two rates move differently
Basis risk occurs when two related interest rates or indices do not move in perfect correlation, creating unexpected gains or losses.
The three lines of defense model in banking risk management assigns which role to internal audit?
Answer: Third line — independent assurance and testing
Internal audit serves as the third line of defense, providing independent assurance that risk controls and governance processes are effective.
A bank sells credit default swaps (CDS) to transfer credit risk off its balance sheet. Which risk does the bank retain regarding the CDS counterparty?
Answer: Counterparty credit risk
Even after transferring credit risk via CDS, the bank faces counterparty credit risk—the risk the CDS seller fails to pay when a credit event occurs.