CBA Risk Management in Banking 3 — Questions and Answers
Question 1: Which metric measures the potential loss in a portfolio's value over a specific time horizon at a given confidence level?
- Expected Shortfall (ES)
- Value at Risk (VaR) (Correct answer)
- Stress Loss Estimate
- Net Stable Funding Ratio (NSFR)
Correct answer: Value at Risk (VaR)
Value at Risk (VaR) estimates the maximum potential loss over a defined period at a specified confidence level (e.g., 99%, 10-day).
Question 2: The Liquidity Coverage Ratio (LCR) requires banks to hold sufficient High-Quality Liquid Assets (HQLA) to survive a stress scenario lasting:
- 7 days
- 14 days
- 30 days (Correct answer)
- 90 days
Correct answer: 30 days
The LCR mandates enough HQLA to cover net cash outflows over a 30-day stress period.
Question 3: A bank extends $50M in loans but only $30M is immediately funded. The $20M gap represents which type of risk?
- Pipeline risk
- Settlement risk
- Funding gap risk (Correct answer)
- Rollover risk
Correct answer: Funding gap risk
A funding gap arises when committed loan disbursements exceed currently available funding, creating a liquidity shortfall.
Question 4: Which approach under Basel III for credit risk uses external credit ratings to assign risk weights to exposures?
- Internal Ratings-Based (IRB) approach
- Advanced Measurement Approach (AMA)
- Standardized Approach (SA) (Correct answer)
- Foundation IRB approach
Correct answer: Standardized Approach (SA)
The Standardized Approach maps exposures to risk weights based on external credit ratings from recognized rating agencies.
Question 5: When a bank auditor identifies that loan loss reserves are systematically below expected loss estimates, this MOST directly indicates a problem with:
- Market risk controls
- Allowance for Credit Loss (ACL) adequacy (Correct answer)
- Operational risk governance
- Capital adequacy reporting
Correct answer: Allowance for Credit Loss (ACL) adequacy
Insufficient loan loss reserves relative to expected losses points to an inadequacy in the Allowance for Credit Loss methodology or application.
Question 6: The Net Stable Funding Ratio (NSFR) is designed to address which banking risk?
- Short-term liquidity stress
- Structural long-term funding mismatches (Correct answer)
- Market volatility in trading books
- Systemic credit contagion
Correct answer: Structural long-term funding mismatches
The NSFR requires banks to maintain stable funding over a one-year horizon, addressing structural long-term funding risk.
Question 7: A bank's trading desk sells protection on a corporate bond via a credit default swap (CDS). If the reference entity defaults, the bank faces:
- Basis risk only
- Contingent credit risk from the protection sold (Correct answer)
- Reduced capital requirements
- Market risk offset from the hedge
Correct answer: Contingent credit risk from the protection sold
Selling CDS protection creates contingent credit risk: the bank must pay the notional amount if the reference entity defaults.
CBA Risk Management in Banking 3
Which metric measures the potential loss in a portfolio's value over a specific time horizon at a given confidence level?