CISI UAE FRR Risk Management Frameworks 2 — Questions and Answers
Question 1: The CBUAE's Operational Risk Management guidance requires banks to maintain a:
- Risk and Control Self-Assessment (RCSA) process to identify and assess operational risks (Correct answer)
- Annual risk report for shareholders only
- Centralised list of all incidents reported to external media
- Daily operational risk calculation for Pillar 1 purposes
Correct answer: Risk and Control Self-Assessment (RCSA) process to identify and assess operational risks
RCSAs involve business units systematically identifying their key operational risks, assessing inherent and residual risk levels, and evaluating the effectiveness of controls, forming the foundation of operational risk management.
Question 2: Under Basel III as implemented in the UAE, the Leverage Ratio requires banks to maintain a minimum ratio of:
- Tier 1 capital of at least 3% of total exposures (Correct answer)
- Total capital of at least 8% of risk-weighted assets
- CET1 of at least 4.5% of risk-weighted assets
- Liquid assets of at least 100% of net outflows
Correct answer: Tier 1 capital of at least 3% of total exposures
The Leverage Ratio requires Tier 1 capital to be at least 3% of total (non-risk-weighted) exposures, acting as a backstop to risk-based capital ratios and preventing excessive leverage.
Question 3: The CBUAE requires banks to have a 'Business Continuity Plan' (BCP) that addresses:
- Recovery of critical functions within defined timeframes after a disruption (Correct answer)
- Annual staff rotation procedures
- Procedures for expanding into new markets
- Plans for voluntary bank liquidation
Correct answer: Recovery of critical functions within defined timeframes after a disruption
BCPs must ensure banks can recover and continue critical operations within agreed Recovery Time Objectives (RTOs) after any significant disruption, whether from technology failure, natural disaster, or other events.
Question 4: Under CBUAE credit risk guidelines, 'Probability of Default' (PD) measures:
- The likelihood that a borrower will default within a given time horizon (Correct answer)
- The loss given default if a borrower fails to repay
- The total exposure at the time of default
- The time elapsed since a loan was originated
Correct answer: The likelihood that a borrower will default within a given time horizon
PD measures the statistical likelihood that a borrower will default on their obligations within a defined period (typically one year), and is a key input to credit risk measurement and IFRS 9 expected credit loss calculations.
Question 5: Which risk management tool identifies the maximum potential loss over a defined period at a given confidence level?
- Value at Risk (VaR) (Correct answer)
- Stress testing
- Scenario analysis
- Net Interest Margin (NIM) analysis
Correct answer: Value at Risk (VaR)
VaR quantifies the maximum expected loss over a defined time horizon (e.g., 1 day) at a specified confidence level (e.g., 99%), providing a single statistical measure of market risk exposure.
Question 6: The CBUAE requires banks to prepare 'Recovery Plans' and regulators prepare 'Resolution Plans' under which framework?
- Recovery and Resolution Planning (RRP) framework (Correct answer)
- Basel III Pillar 2 ICAAP
- Liquidity Contingency Planning framework
- Systemic Risk Buffer framework
Correct answer: Recovery and Resolution Planning (RRP) framework
Recovery Plans (by banks) and Resolution Plans (by regulators) are prepared under the RRP framework, ensuring that systemically important banks can either recover from distress or be resolved in an orderly manner without public funds.
CISI UAE FRR Risk Management Frameworks 2
The CBUAE's Operational Risk Management guidance requires banks to maintain a: