Credit Risk Management Credit Risk Management MCQ 2

Question 1

Which Basel III metric requires banks to maintain a minimum ratio of high-quality liquid assets to net cash outflows over a 30-day stress period?

Accepted Answer

Liquidity Coverage Ratio (LCR)

Answer

The Liquidity Coverage Ratio (LCR) requires banks to hold enough high-quality liquid assets to survive a 30-day stress scenario.

Question 2

A bank's loan portfolio has an expected loss of $2M and unexpected loss of $8M. What is the total economic capital needed if the bank uses a confidence level that covers both?

Accepted Answer

$10M

Answer

Economic capital covers both expected and unexpected losses, so the total is $2M + $8M = $10M.

Question 3

In credit risk modeling, what does a 'through-the-cycle' (TTC) rating approach primarily aim to achieve?

Accepted Answer

Remain stable across economic cycles by capturing long-run average risk

Answer

TTC ratings aim to be stable across the business cycle by reflecting long-run average credit quality rather than current conditions.

Question 4

Which concentration risk measure captures the additional risk from having large exposures to a single counterparty or sector?

Accepted Answer

Herfindahl-Hirschman Index (HHI)

Answer

The Herfindahl-Hirschman Index quantifies concentration by summing squared market shares or exposure fractions.

Question 5

Under the IRB approach, which parameter directly captures the percentage of exposure a bank expects to lose given a default has occurred?

Accepted Answer

Loss Given Default (LGD)

Answer

Loss Given Default (LGD) represents the fraction of EAD that the bank expects to lose after recoveries when a borrower defaults.

Credit Risk Management Practice Test

Credit Risk Management Practice Test

Credit Risk Management Credit Risk Management MCQ 2