CBA Risk Management 3 — Questions and Answers
Question 1: A bank discovers its loan loss model systematically underestimates defaults during economic downturns. This is an example of:
- Credit concentration risk
- Model risk (Correct answer)
- Operational risk
- Strategic risk
Correct answer: Model risk
Model risk arises when a model produces inaccurate outputs due to flawed assumptions, errors, or misuse.
Question 2: Which metric measures the potential loss on a trading portfolio over a given time horizon at a specified confidence level?
- Expected Loss (EL)
- Value at Risk (VaR) (Correct answer)
- Net Stable Funding Ratio (NSFR)
- Return on Risk-Adjusted Capital (RORAC)
Correct answer: Value at Risk (VaR)
VaR quantifies the maximum expected loss over a specific period at a given confidence level (e.g., 99% over one day).
Question 3: Under the OCC's heightened standards for large banks, which governance body bears ultimate responsibility for the bank's risk appetite?
- Chief Risk Officer
- Executive Management Committee
- Board of Directors (Correct answer)
- Internal Audit Committee
Correct answer: Board of Directors
The Board of Directors is ultimately responsible for approving and overseeing the bank's risk appetite framework.
Question 4: A bank experiences a sudden large outflow of deposits due to negative social media rumors. This scenario represents:
- Market risk
- Reputational risk triggering liquidity risk (Correct answer)
- Interest rate risk
- Compliance risk
Correct answer: Reputational risk triggering liquidity risk
Reputational risk can rapidly convert into liquidity risk when depositor confidence erodes and withdrawals spike.
Question 5: The Risk Appetite Statement (RAS) should be MOST closely aligned with:
- The bank's internal audit plan
- The bank's strategic plan and business model (Correct answer)
- Regulatory capital minimums
- Competitor risk benchmarks
Correct answer: The bank's strategic plan and business model
An effective RAS links the amount of risk a bank is willing to accept to achieving its strategic objectives.
Question 6: Which Basel III capital ratio uses risk-weighted assets in the denominator?
- Leverage ratio
- Liquidity Coverage Ratio
- Common Equity Tier 1 (CET1) ratio (Correct answer)
- Net Stable Funding Ratio
Correct answer: Common Equity Tier 1 (CET1) ratio
The CET1 ratio is calculated as common equity tier 1 capital divided by total risk-weighted assets.
Question 7: A Key Risk Indicator (KRI) that consistently breaches its threshold should trigger:
- Immediate dismissal of the responsible manager
- Escalation to senior management and remediation planning (Correct answer)
- Removal from the KRI dashboard
- An external audit by regulators
Correct answer: Escalation to senior management and remediation planning
Threshold breaches signal that risk levels are elevated and require escalation and a documented response plan.
CBA Risk Management 3
A bank discovers its loan loss model systematically underestimates defaults during economic downturns.
This is an example of: