Banking Risk Management 4

Question 1

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

Accepted Answer

The average loss in scenarios that exceed the VaR threshold

Answer

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

Question 2

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

Accepted Answer

Both DFAST and CCAR

Answer

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

Question 3

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

Accepted Answer

Prepayment risk

Answer

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

Question 4

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

Accepted Answer

The percentage of exposure a lender loses if the borrower defaults

Answer

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

Question 5

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

Accepted Answer

Risk of loss resulting from errors or misuse of quantitative models

Answer

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

Banking Practice Test

Banking Practice Test

Banking Risk Management 4