Banking Risk Management 3

Question 1

What is the primary purpose of a bank's stress testing program?

Accepted Answer

To evaluate capital adequacy under adverse economic scenarios

Answer

Stress testing assesses whether a bank maintains sufficient capital to absorb losses during hypothetical adverse economic conditions.

Question 2

Which of the following best describes 'operational risk' in a banking context?

Accepted Answer

Risk of loss from inadequate processes, people, systems, or external events

Answer

Operational risk covers losses stemming from internal failures—people, processes, systems—or external events like fraud or natural disasters.

Question 3

Under the Net Stable Funding Ratio (NSFR), which of the following is the correct relationship that must be maintained?

Accepted Answer

Available Stable Funding ≥ Required Stable Funding

Answer

The NSFR requires that Available Stable Funding (ASF) must equal or exceed Required Stable Funding (RSF) to ensure long-term liquidity resilience.

Question 4

A bank's risk appetite statement is best described as:

Accepted Answer

The amount and type of risk the bank is willing to accept to achieve its objectives

Answer

A risk appetite statement defines the level and types of risk the board and management are willing to accept in pursuit of strategic goals.

Question 5

Which of the following scenarios represents 'basis risk' in banking?

Accepted Answer

A bank's LIBOR-based loans are funded by Prime-rate deposits, and the two rates move differently

Answer

Basis risk occurs when two related interest rates or indices do not move in perfect correlation, creating unexpected gains or losses.

Banking Practice Test