Risk Management in Banking 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 in Banking flashcards as text
Which of the following scenarios BEST illustrates 'settlement risk' in banking?
Answer: A bank pays on a foreign exchange trade but the counterparty fails to deliver before settlement completes
Settlement risk (Herstatt risk) arises when one party fulfills its payment obligation but the counterparty fails to deliver before final settlement.
A bank auditor performing a credit review should focus on the 'five Cs of credit.' Which of the following is NOT one of the five Cs?
Answer: Compliance
The five Cs of credit are Character, Capacity, Capital, Collateral, and Conditions—Compliance is not among them.
The regulatory requirement that prohibits banks from engaging in proprietary trading for their own profit using customer deposits is known as the:
Answer: Volcker Rule
The Volcker Rule, part of Dodd-Frank, restricts banks from proprietary trading and limits their investments in hedge funds and private equity.
In credit risk management, 'loss given default' (LGD) represents:
Answer: The proportion of exposure that is expected to be lost if a default occurs
LGD is the fraction of the exposure at default (EAD) that a bank expects to lose after accounting for recoveries and collateral.
A bank experiences significant losses from unauthorized trading by a single trader who concealed positions for months. Which risk framework gap MOST directly caused this failure?
Answer: Weak market risk limits and position monitoring controls
Rogue trader events typically result from inadequate position limits, weak reconciliation controls, and insufficient independent monitoring of trading books.
When auditing a bank's interest rate risk management, which document MOST directly reflects how management measures and limits IRRBB exposure?
Answer: Asset-Liability Committee (ALCO) policy and meeting minutes
The ALCO policy and its meeting minutes document how management measures, monitors, and sets limits on interest rate risk in the banking book.
Which of the following BEST describes 'basis risk' in the context of interest rate risk management?
Answer: Risk that interest rates change at different rates for different instruments with the same maturity
Basis risk occurs when instruments with similar maturities reprice at different rates (e.g., LIBOR vs. prime rate), creating unhedged exposure.