Risk Management in Banking Flashcards

Under Basel III, what is the minimum Common Equity Tier 1 (CET1) capital ratio required for banks?

Answer: 4.5%

Basel III requires banks to hold a minimum CET1 ratio of 4.5% of risk-weighted assets.

Which risk management technique involves assigning probability distributions to uncertain variables to assess the range of possible outcomes?

Answer: Monte Carlo simulation

Monte Carlo simulation uses random sampling across probability distributions to model the range of possible financial outcomes.

A bank's net interest margin (NIM) declines when interest rates rise unexpectedly. This is an example of which risk?

Answer: Interest rate risk in the banking book (IRRBB)

IRRBB captures the adverse impact of interest rate movements on a bank's net interest income and economic value.

The risk that a bank cannot meet its payment obligations as they fall due without incurring unacceptable losses is called:

Answer: Funding liquidity risk

Funding liquidity risk is the inability to raise funds to meet obligations on time without unacceptable cost.

Which of the following best describes the 'repricing risk' component of interest rate risk?

Answer: Risk from timing differences in asset and liability maturity or repricing

Repricing risk arises from timing mismatches between when assets and liabilities reprice or mature.

A bank auditor reviewing credit concentration risk should MOST likely focus on:

Answer: Large exposures to single borrowers or correlated sectors

Credit concentration risk is the exposure to large individual borrowers or highly correlated borrower groups that can cause significant loss.

Under the standardized approach for operational risk capital (Basel III), the Business Indicator Component (BIC) is multiplied by which factor?

Answer: Internal Loss Modifier (ILM)

Under Basel III's Standardized Approach, the BIC is multiplied by the Internal Loss Modifier to determine operational risk capital requirements.