CISI UAE FRR Risk Management Frameworks 3 — Questions and Answers
Question 1: Under CBUAE guidance, 'Interest Rate Risk in the Banking Book' (IRRBB) includes which sub-type of risk?
- Repricing risk, yield curve risk, basis risk, and optionality risk (Correct answer)
- Credit risk arising from interest rate changes
- Operational risk from interest rate system errors
- Foreign exchange risk from dollar-denominated assets
Correct answer: Repricing risk, yield curve risk, basis risk, and optionality risk
IRRBB has four key components: repricing risk (timing differences in rate resets), yield curve risk (non-parallel shifts), basis risk (different rate indices), and optionality risk (embedded options in products).
Question 2: The CBUAE's guidance on credit risk provisioning under IFRS 9 requires banks to recognise:
- Expected Credit Losses (ECL) based on forward-looking probability-weighted scenarios (Correct answer)
- Losses only when they have been incurred (incurred loss model)
- Provisions based exclusively on historical default rates
- Provisions only for loans more than 90 days past due
Correct answer: Expected Credit Losses (ECL) based on forward-looking probability-weighted scenarios
IFRS 9 requires forward-looking ECL provisioning across three stages based on credit deterioration, replacing the IAS 39 incurred loss model with earlier recognition of potential credit losses.
Question 3: Under UAE risk management frameworks, 'Key Risk Indicators' (KRIs) are used to:
- Provide early warning signals that risk levels are approaching or exceeding appetite thresholds (Correct answer)
- Measure actual losses incurred in the reporting period
- Calculate regulatory capital requirements
- Report historical risk events to the board annually
Correct answer: Provide early warning signals that risk levels are approaching or exceeding appetite thresholds
KRIs are forward-looking metrics that signal when risk exposure is moving towards or beyond agreed thresholds, enabling management to take pre-emptive action before losses materialise.
Question 4: The CBUAE's Supervisory Review and Evaluation Process (SREP) assesses:
- Business model viability, governance, capital adequacy, and liquidity risk holistically (Correct answer)
- Only capital adequacy against Basel III minimum ratios
- Exclusively the bank's AML/CFT compliance
- Technology infrastructure and IT security
Correct answer: Business model viability, governance, capital adequacy, and liquidity risk holistically
SREP is a comprehensive supervisory assessment covering business model sustainability, governance quality, internal capital adequacy (ICAAP), internal liquidity adequacy (ILAAP), and overall risk profile to set supervisory capital and liquidity add-ons.
Question 5: Under the UAE's risk management framework, 'Wrong Way Risk' refers to:
- Correlation between counterparty default risk and the value of the exposure increasing simultaneously (Correct answer)
- Trading positions taken against internal risk limits
- Model errors that underestimate actual risk
- Risk that increases when markets move in the expected direction
Correct answer: Correlation between counterparty default risk and the value of the exposure increasing simultaneously
Wrong Way Risk occurs when exposure to a counterparty increases at the same time as the probability of their default — for example, buying protection from a counterparty whose creditworthiness is linked to the reference asset.
Question 6: UAE banks are required to report their Internal Capital Adequacy Assessment Process (ICAAP) to the CBUAE:
- Annually, with the Board's approval of the assessment (Correct answer)
- On a daily basis
- Only when capital ratios fall below minimum requirements
- At the time of licence renewal only
Correct answer: Annually, with the Board's approval of the assessment
Banks must conduct and submit their ICAAP annually with Board approval, demonstrating that they have assessed all material risks comprehensively and hold adequate capital buffers above regulatory minimums.
CISI UAE FRR Risk Management Frameworks 3
Under CBUAE guidance, 'Interest Rate Risk in the Banking Book' (IRRBB) includes which sub-type of risk?