Risk Management in Banking Flashcards

Which metric measures the potential loss in a portfolio's value over a specific time horizon at a given confidence level?

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).

The Liquidity Coverage Ratio (LCR) requires banks to hold sufficient High-Quality Liquid Assets (HQLA) to survive a stress scenario lasting:

Answer: 30 days

The LCR mandates enough HQLA to cover net cash outflows over a 30-day stress period.

A bank extends $50M in loans but only $30M is immediately funded. The $20M gap represents which type of risk?

Answer: Funding gap risk

A funding gap arises when committed loan disbursements exceed currently available funding, creating a liquidity shortfall.

Which approach under Basel III for credit risk uses external credit ratings to assign risk weights to exposures?

Answer: Standardized Approach (SA)

The Standardized Approach maps exposures to risk weights based on external credit ratings from recognized rating agencies.

When a bank auditor identifies that loan loss reserves are systematically below expected loss estimates, this MOST directly indicates a problem with:

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.

The Net Stable Funding Ratio (NSFR) is designed to address which banking risk?

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.

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:

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.