Financial Risk Management Flashcards
7 cards from real CBP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Financial Risk Management flashcards as text
Which regulatory framework introduced the concept of the 'leverage ratio' as a non-risk-based backstop measure for banks?
Answer: Basel III
Basel III introduced the leverage ratio (Tier 1 Capital / Total Exposure) as a non-risk-based backstop to supplement risk-weighted capital requirements.
In credit risk modeling, 'through-the-cycle' (TTC) ratings are preferred over 'point-in-time' (PIT) ratings for which purpose?
Answer: Long-term economic capital calculations and stress testing
TTC ratings smooth out cyclical fluctuations and reflect long-run average default probabilities, making them more suitable for capital planning and stress testing.
A bank's ALM committee is concerned about repricing risk. This risk occurs when:
Answer: Assets and liabilities reprice at different times, exposing the bank to interest rate changes
Repricing risk arises when assets and liabilities have different maturity or repricing schedules, exposing net interest income to changes in interest rates.
Which of the following best describes 'wrong-way risk' in counterparty credit risk?
Answer: The adverse correlation between counterparty default probability and exposure size
Wrong-way risk occurs when the exposure to a counterparty increases precisely when the counterparty's creditworthiness deteriorates, amplifying potential losses.
Under Pillar 2 of Basel III, what is the purpose of the Internal Capital Adequacy Assessment Process (ICAAP)?
Answer: To allow banks to self-assess all material risks and required capital beyond Pillar 1 minimums
ICAAP requires banks to internally assess all material risks (including those not fully covered by Pillar 1) and ensure adequate capital is held against them.
A bank uses a 'haircut' when accepting collateral for a secured loan. The haircut primarily protects against:
Answer: A decline in collateral value before it can be liquidated
A haircut reduces the recognized collateral value below market price to protect the lender if collateral must be sold quickly during a default at a lower price.
Which approach to measuring operational risk capital under Basel requires banks to use their own internal loss data and business environment indicators?
Answer: Advanced Measurement Approach (AMA)
The AMA allows banks to use internal loss data, external loss data, scenario analysis, and business environment/internal control factors to calculate operational risk capital.