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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.

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  1. What is 'Expected Shortfall' (ES), also called Conditional VaR (CVaR)?

    Answer: The average loss in scenarios that exceed the VaR threshold

    Expected Shortfall (ES) measures the average loss in the tail of the distribution beyond the VaR threshold, capturing tail risk better than VaR alone.

  2. Which regulation requires large U.S. bank holding companies to submit annual capital plans and stress test results to the Federal Reserve?

    Answer: Both DFAST and CCAR

    Both DFAST (public stress test disclosure) and CCAR (capital plan approval process) apply to large U.S. bank holding companies under Fed oversight.

  3. A bank holding mortgage-backed securities experiences losses when homeowners prepay their mortgages faster than expected as rates fall. This is known as:

    Answer: Prepayment risk

    Prepayment risk occurs when borrowers refinance or pay off mortgages early during falling rate environments, shortening the expected cash flow duration.

  4. In the context of credit risk, what does 'Loss Given Default' (LGD) represent?

    Answer: The percentage of exposure a lender loses if the borrower defaults

    LGD is the proportion of the total exposure that a lender cannot recover after a borrower defaults, expressed as a percentage.

  5. Which of the following best describes 'model risk' in banking?

    Answer: Risk of loss resulting from errors or misuse of quantitative models

    Model risk is the potential for adverse consequences from decisions based on flawed, misused, or incorrectly implemented quantitative models.

  6. A community bank heavily concentrated in commercial real estate (CRE) loans is most exposed to which supervisory concern?

    Answer: Concentration risk in a cyclical asset class

    Supervisors closely monitor CRE concentration because real estate values are cyclical and a downturn can cause simultaneous losses across a concentrated portfolio.

  7. Which pillar of the Basel framework requires banks to publicly disclose their risk exposures, capital adequacy, and risk management practices?

    Answer: Pillar 3 — Market Discipline

    Pillar 3 (Market Discipline) mandates public disclosure of risk and capital information so that market participants can assess a bank's risk profile.