Risk Management Frameworks Flashcards

Under CBUAE guidance, 'credit risk mitigation' techniques include:

Answer: Collateral, guarantees, netting agreements, and credit derivatives

Credit risk mitigation involves using collateral (mortgages, pledges), guarantees from creditworthy third parties, netting agreements, and credit derivatives to reduce the exposure in case of borrower default.

The CBUAE's Pillar 3 disclosure requirements mandate that banks publicly report:

Answer: Capital adequacy ratios, risk exposures, and governance information to enhance market discipline

Pillar 3 market discipline disclosures require banks to publish key risk and capital data — including capital ratios, risk exposures, and governance arrangements — enabling market participants to assess the bank's risk profile.

Under UAE risk management frameworks, the 'risk register' serves as:

Answer: A comprehensive inventory of identified risks, their assessments, owners, and mitigation actions

A risk register documents all identified risks, their likelihood and impact assessments, assigned risk owners, existing controls, residual risk levels, and planned mitigation actions — the central repository for risk management.

Under CBUAE regulations, banks must appoint a Chief Risk Officer (CRO) who:

Answer: Is independent of business line management and has direct access to the Board Risk Committee

The CRO must be independent of commercial and business line management, with direct access to the Board Risk Committee to escalate risk concerns, ensuring unfiltered Board oversight of risk.

What is 'Expected Loss' (EL) in credit risk modelling used by UAE banks?

Answer: EL = Probability of Default × Loss Given Default × Exposure at Default

EL is calculated as PD (probability of borrower defaulting) multiplied by LGD (proportion of exposure lost if default occurs) multiplied by EAD (outstanding balance at time of default), providing the average expected loss.

The CBUAE's framework requires banks to assess 'recovery value' in credit risk management using:

Answer: LGD (Loss Given Default) incorporating collateral realisable value and recovery costs

LGD measures the proportion of exposure expected to be lost after default, incorporating the realisable value of collateral (net of forced sale discounts and recovery costs) and the unsecured portion of the exposure.