Banking Risk Management 5

Question 1

A bank's chief risk officer (CRO) reports a Key Risk Indicator (KRI) that has breached its threshold. What is the primary purpose of a KRI in risk management?

Accepted Answer

To provide early warning signals of increasing risk exposure

Answer

KRIs are forward-looking metrics designed to signal rising risk levels before they materialize into actual losses.

Question 2

Under the Dodd-Frank Act, systemically important financial institutions (SIFIs) are required to prepare which document to demonstrate they can be wound down without taxpayer bailout?

Accepted Answer

Living Will (Resolution Plan)

Answer

SIFIs must file Living Wills—formal resolution plans showing regulators how the firm could be safely wound down during severe financial distress.

Question 3

A bank issues a loan at a fixed rate funded by variable-rate deposits. If interest rates rise, the bank's net interest income will most likely:

Accepted Answer

Decrease, because funding costs rise while loan income stays fixed

Answer

When a fixed-rate loan is funded by variable-rate deposits, rising rates increase funding costs without a corresponding increase in loan income, compressing NIM.

Question 4

The 'unexpected loss' component in credit risk modeling is important because:

Accepted Answer

It represents the deviation from average losses that capital must absorb

Answer

Unexpected loss is the volatility around average (expected) losses, and banks must hold regulatory capital precisely to absorb these tail outcomes.

Question 5

Which of the following is an example of reputational risk in banking?

Accepted Answer

Negative media coverage following an anti-money-laundering compliance failure

Answer

Reputational risk arises when events—such as AML failures publicized in the media—damage customer trust and the institution's public image.

Banking Practice Test

Banking Practice Test

Banking Risk Management 5