Banking Risk Management 2 — Questions and Answers
Question 1: Under Basel III, what is the minimum Common Equity Tier 1 (CET1) capital ratio required for banks?
- 2.5%
- 4.5% (Correct answer)
- 6.0%
- 8.0%
Correct answer: 4.5%
Basel III requires banks to hold a minimum CET1 capital ratio of 4.5% of risk-weighted assets.
Question 2: Which risk metric measures the maximum expected loss over a given time period at a specified confidence level?
- Expected Shortfall
- Value at Risk (VaR) (Correct answer)
- Beta
- Sharpe Ratio
Correct answer: Value at Risk (VaR)
Value at Risk (VaR) estimates the maximum potential loss over a specific time horizon at a given confidence level.
Question 3: A bank's net interest margin (NIM) compresses when short-term rates rise faster than long-term rates. This is an example of which risk?
- Credit risk
- Operational risk
- Interest rate risk (Correct answer)
- Liquidity risk
Correct answer: Interest rate risk
Interest rate risk arises when changes in interest rates adversely affect a bank's net interest income or asset values.
Question 4: What does a bank's Liquidity Coverage Ratio (LCR) measure?
- Ability to cover credit losses over 12 months
- Adequacy of high-quality liquid assets to survive a 30-day stress scenario (Correct answer)
- Ratio of deposits to loans
- Coverage of non-performing loans by reserves
Correct answer: Adequacy of high-quality liquid assets to survive a 30-day stress scenario
The LCR requires banks to hold enough high-quality liquid assets (HQLA) to cover net cash outflows during a 30-day stress period.
Question 5: Which internal control framework is most commonly referenced by U.S. banks for assessing risk management and internal controls?
- ISO 31000
- COSO ERM Framework (Correct answer)
- COBIT
- NIST Cybersecurity Framework
Correct answer: COSO ERM Framework
The COSO Enterprise Risk Management (ERM) Framework is the dominant standard U.S. banks use to evaluate internal controls and risk governance.
Question 6: When a loan borrower's credit rating is downgraded but the loan has not defaulted, the bank faces which type of credit risk?
- Default risk
- Settlement risk
- Migration risk (Correct answer)
- Concentration risk
Correct answer: Migration risk
Migration risk is the risk that a borrower's credit quality deteriorates (rating downgrade) even before an actual default occurs.
Question 7: A bank grants a large loan to a single corporate borrower representing 30% of its total loan portfolio. This primarily creates which risk?
- Model risk
- Concentration risk (Correct answer)
- Basis risk
- Pipeline risk
Correct answer: Concentration risk
Concentration risk arises when a bank's exposures are heavily weighted toward a single borrower, sector, or geography.
Banking Risk Management 2
Under Basel III, what is the minimum Common Equity Tier 1 (CET1) capital ratio required for banks?