Risk Management Flashcards
7 cards from real CBA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Risk Management flashcards as text
Counterparty credit risk in derivatives is BEST described as:
Answer: The risk that the other party to a derivative contract defaults before final settlement
Counterparty credit risk is the possibility that a derivative counterparty will default before the contract's obligations are fulfilled.
Which approach under Basel II/III requires banks to use their own internal estimates of PD, LGD, and EAD to calculate credit risk capital requirements?
Answer: Internal Ratings-Based (IRB) Approach
The IRB Approach allows qualifying banks to use internally estimated risk parameters (PD, LGD, EAD) to determine regulatory capital.
A bank's treasury desk fails to hedge a large foreign currency receivable, resulting in a $2M loss when the dollar strengthens. This loss is attributable to:
Answer: Market risk
Foreign exchange exposure that results in losses due to adverse currency movements is a market risk event.
The concept of 'risk culture' within a bank primarily refers to:
Answer: The shared values, beliefs, and behaviors that shape how employees identify and manage risk
Risk culture encompasses the norms and attitudes that influence risk-taking decisions at all levels of an organization.
When a bank sells mortgages and retains the servicing rights, the retained servicing rights create exposure to which specific risk?
Answer: Prepayment risk
Mortgage servicing rights lose value when prepayments accelerate (typically when rates fall), creating significant prepayment risk.
An effective risk control self-assessment (RCSA) process requires business units to:
Answer: Identify risks, assess controls, and document residual risk within their own operations
RCSA is a first-line tool where business units take ownership of identifying risks and evaluating the effectiveness of their controls.
Which scenario BEST illustrates tail risk in banking?
Answer: A systemic financial crisis causing correlated defaults across the entire loan portfolio
Tail risk refers to extreme, low-probability events with severe consequences, such as a systemic crisis causing widespread correlated defaults.